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The rise of new forms of limited liability business entities, coupled with changes in the federal tax rules for classifying such entities, has precipitated an influx of businesses that are treated as partnerships for federal tax purposes. Some commentators welcome what they perceive as a process of de facto integration that promises eventually to make an elective regime of pass-through taxation available for all nonpublicly-traded businesses. To the extent that the partnership model, as currently embodied in Subchapter K, represents a coherent and well-functioning body of law, such a sanguine view may be justified. However, as the preliminary work of the American Law Institute (ALI) project on pass-through entities suggests, the intricate provisions of Subchapter K may be "dysfunctional" in important respects.Indeed, Subchapter K may have reached an important turning point. The 1954 Code drafters stressed simplicity and flexibility while allowing partners considerable latitude in allocating tax benefits and burdens among themselves. With the benefit of hindsight, this tolerant attitude toward shifting tax consequences among partners appears to undermine broader tax policy goals. Concern about the flexibility of partnership taxation-particularly the ease of entry and exit-has led some partnership reformers to veer in the opposite direction. Recent legislative attempts to confine the broad nonrecognition policy of section 72 1-especially with respect to contributions of property with built-in gain or loss, disguised sales, and distributions of previously contributed property-signal Congressional ambivalence about Subchapter K's unrivaled flexibility.

These two volumes offer an interdisciplinary perspective on major issues which lie at the heart of the current debate over social security reform. Each volume contains a series of papers from a broad range of contributors, including economists, actuaries, investment managers, political scientists, and policymakers. In analyzing various specific proposals and conceptual models for reform, the contributors identify some areas of emerging consensus as well as numerous conflicts, tensions, and tradeoffs which ultimately must be resolved through the political process. The result is a valuable survey of proposals and trends which will determine the direction of future reform.

Family partnerships have been become increasingly popular as a means of avoiding estate and gift taxes. As other estate freezing techniques have been closed off by statutory anti-abuse rules, estate planners have increasingly resorted to partnerships as a vehicle for transferring assets within a family at deeply discounted values. Discounts ranging from one third to over one half of the value of the underlying assets are routinely claimed, and often allowed, based on lack of marketability and lack of control, even where these disabilities have no lasting or ascertainable economic effect. Nevertheless, the use of family partnerships to suppress value for transfer tax purposes rests on shaky conceptual premises that deserve closer scrutiny.

Notice 2006-14 invites comments concerning proposals to simplify and rationalize the treatment of disproportionate distributions that rearrange the partners’ shares of unrealized appreciation in ordinary income and capital gain assets (“hot asset distributions”). Specifically, the Notice requests comments concerning whether to adopt the “hot asset sale” approach in lieu of the imputed exchange mechanism under the current section 751(b) regulations. Upon a current nonprorata distribution, the hot asset sale approach would be coupled with a revaluation of partnership property and special allocations to preserve shares of built-in hot asset gain to the extent possible. Although enacted in 1954, section 751(b) has remained largely unchanged. Indeed, the regulations issued in 1956 have never been updated to reflect the modern concept of revaluations and section 704(c) allocations. While section 751(b) is sometimes viewed mainly as concerned with the character of income, it also has a significant impact on the timing of gain recognition.

Section 1411 imposes a 3.8% surtax on investment income of high earners that mirrors Medicare taxes on earned income. The enactment of the net investment income tax highlights gaps in the employment tax rules for passthrough entities—particularly limited partnerships, S corporations, and limited liability companies. This Article considers how businesses can be structured to allow active high-income owner-employees of passthrough entities to avoid all three of the 3.8% Medicare taxes (SECA, FICA and section 1411). Part I considers the anachronistic limited partner exception to the SECA tax and the well-known S corporation loophole under the FICA tax, as well as the failure of section 1411 to reach active business income that avoids these employment taxes. Part II considers the recent Renkemeyer case, which has reignited the employment tax debate and threatens to upend structures used in investment and real estate funds to shelter management fees from all of the 3.8% taxes. Although repeal of section 1411 remains high on the Republican tax-cutting agenda, Part III suggests the need to reform (not repeal) section 1411 to backstop the employment tax rules for active passthrough businesses, regardless of organizational form. The proposed approach would curtail opportunities to avoid the 3.8% taxes, raise substantial revenue, and promote the goal of parity in the taxation of earned and unearned income. By contrast, tax legislation enacted in 2017 leaves intact planning to avoid employment taxes and section 1411, while dramatically lowering the income tax rate on business income. As a result, business taxation has grown increasingly incoherent, regressive, and unstable.