Accounting for Partnership Changes
BY CHAUNCEY A. NORTON PARTNER, DETROIT OFFICE
Presented before the Michigan Association of Certified Public Accountants and the Michigan Law Institute — December, 1955
In the report of the Senate Committee on Finance on the Internal Revenue Code of 1954, the section relating to partners and partnerships begins with these words, (1) "The existing tax treatment of partners and partnerships is among the most confused in the entire income tax field." I can agree completely with that statement. I wish it were possible to report that the new partnership provisions contained in the 1954 Code had removed all confusion from this area but, unfortunately, such is not the case.
Prior income tax law relating to partnerships grew largely by administrative
rulings and judicial decisions. The Internal Revenue Code of 1954, for the first time, has attempted to provide, by statute, objective
rules which would be, to paraphrase the Senate Committee Report, (2) simple, flexible, and equitable. While the new Code has made substantial
strides toward that goal it is a goal which is very difficult, and perhaps
impossible, of complete achievement. In the meantime we have to work within the framework of the existing statute where it applies and of law established by administrative and judicial precedents where it does not. My remarks today will be limited to a discussion of those provisions of the Internal Revenue Code which have been assigned to me.
My assignment is to discuss the rules relating to distributions by partnerships and transfers of partnership interests. I think that complicated
provisions of tax law are always easier to understand if we can first understand the reasons why they were enacted and the general types of situations they are designed to produce or to prevent. It is not always easy to understand what a Congressman has in his mind when he introduces a new law, but I think there are a few general principles which we can all agree apply to the area of partnership distributions and transfers. Let me state three of them very briefly:
1. It should not be possible to convert ordinary income to capital
gains by means of partnership distributions or transfers.
2. It should not be possible to shift income or categories of income,
such as capital gain, among individuals by changes in the structure of partnerships.