“Proposed Cure for Section 704(b) May Be Worse Than the Disease”

Michael Overstreet and Tim Dean article on “Proposed Cure for Section 704(b) May Be Worse Than the Disease”

In an article published on April 4, 2022 in Bloomberg Tax, Houston-based Senior Associate Michael Overstreet and Associate Tim Dean discuss a draft of proposed legislation from Sen. Ron Wyden which aims to simplify the Internal Revenue Code by eliminating the substantial economic effect test under Section 704(b). They further explain that changing the code would affect groups presumably beyond its intended scope, including closely-held and family-owned businesses.

“Determining whether an allocation to a partner has substantial economic effect involves a two-part analysis, as noted in Treas. Reg. § 1.704-1(b)(2)(i),” they write. “First, the allocation must have economic effect, and second, the economic effect of the allocation must be substantial.”

They conclude by explaining that “if the proposed legislation is adopted, partnerships—particularly those with related partners—must consult with experienced tax professionals to ensure compliance and limit undesirable effects. For many taxpayers, the proposed treatment for Section 704(b) may be worse than the disease.”

To view the article on Bloomberg Tax click here.