Structuring Tiered Partnerships: Advanced Tax Planning Strategies, Avoiding Tax Traps

Tiered partnership arrangements are ownership structures where one pass-through entity, a lower-tier entity, is owned by one or more other taxable entities, an upper-tier entity, allowing limited liability, asset protection, and tax advantages for owners. Despite these advantages, implementing tiered structures involves a careful analysis of complex rules and regulations to avoid unintended tax consequences.

Beyond the planning methods associated with the protection of assets and shielding liability, one of the most complex areas related to tiered partnership arrangements involves the contribution of property. Tiered partnership rules under Sections 704(c) and 743(b) may not yield the expected tax benefits to a taxpayer. For instance, a taxpayer who pays fair market value for a partnership interest with associated Section 704(c) property may not receive the desired tax deduction if the property is subsequently contributed to another partnership. An understanding of structuring methods to work around this issue will avoid this result.

In addition to structuring obstacles relating to the contribution of property and the treatment of allocations and deductions, tax counsel and advisers must consider items provided under tax reform, such as the applicability of the 20 percent pass-through tax deduction. Furthermore, tax advisers should analyze the IRS partnership audit rules allowing a push-out election.

Listen as our panel explains tax rules impacting tiered partnership arrangements, treatment of allocations and deductions in the contribution of property, the impact of tax reform and IRS partnership audit rules, and effective methods to avoid unintended tax consequences to taxpayers.