Illusory Partnership Interests and the Anti-Antiabuse Rule

Abstract

In this special report, the authors examine the continuing validity of the Culbertson standard for determining the validity of a partnership for federal income tax purposes. In recent litigation, notably Castle Harbour, taxpayer’s counsel have argued that section 704(e)(1) validates partner status based solely on ownership of a capital interest, making Culbertson essentially irrelevant for capital-intensive partnerships. This argument seeks to portray section 704(e)(1) as a repudiation of Culbertson and related doctrines underlying the partnership anti-abuse rule. Properly understood, however, section 704(e)(1) was never intended to validate illusory partnership interests or to sanction the use of partnerships for tax avoidance purposes.

Keywords: partnership, member, economic substance, check-the-box, Castle Harbour, Culbertson

JEL Classification: K34