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Abstract

With the Internal Revenue Code of 1954 not yet three months old, reams have already been written about it, more reams are being written and more will be written. It would be interesting to speculate with the statisticians, the “believe-it-or-not” and the “strange-as-it-seems” boys as to how many times around the globe all the lines written and to be written on that Code would stretch, if laid end to end.

It seems doubtful whether any substantial contribution to the understanding of the partnership provisions of that Code can be contributed by these lines. This is particularly true in view of the fact that the most significant lines have not, at this writing, been drafted. The reference is, of course, to the regulations. And as anyone who has wrestled with the 1939 Code will bear witness, it would have been easier for Theseus to penetrate the Labyrinth without his spool of thread than for us mortals to understand, work with, and live with the Code without the regulations. Especially in an area as complex as the taxation of partners and partnerships, guidance from regulations is essential. Recognition of this hard fact by Congress is evidenced by the many instances when the “Secretary or his delegate” are called upon by the statutory language of the new Code to fill in the details necessary for the implementation of the congressional policy.

It is with some misgivings, then, that we undertake to explain even so narrow a corner of the new tax law as the manner of its operation upon certain changes in the membership of partnerships.

Before getting down to details, one general observation may be made. The general rules under the 1954 Code for the treatment of partnerships are not, except in a few areas, much different from those of former law and practice. However, the elections afforded by the 1954 Code to deviate from these general rules are extremely significant. Although this makes the lawyer’s work more burdensome, the elective rules will often ease the client’s tax burden and awareness of their existence is, therefore, compulsory.

This article deals with the rules of the 1954 Code applicable to certain changes in partnership membership. In brief, the following situations will be discussed: (1) The sale of the partnership business; (2) The sale of the interest of a partner; (3) The retirement (or withdrawal) of a partner. Like the statute, the article must distinguish between partnerships whose assets include no “unrealized receivables” or “substantially appreciated inventory” and those whose assets include such items. The latter may be colloquially referred to as “collapsible partnerships”, the former as “non-collapsible” partnerships.

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