The Distinction Between Partnership Debt and Partnership Equity

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Insights and strategies in a rapidly changing area for taxpayers who want to be characterized as partners for tax purposes but want an investment that economically is very close to debt.

Much ink has been spilled on the distinction between debt and equity, which is a favorite topic  of tax lawyers. Most of the discussion has been in  the context of corporations. However, with the  business world’s widespread use of limited liability companies, which usually are treated as  partnerships for tax purposes if they have more  than one owner, the distinction between debt and  equity in the partnership context has become  more meaningful. There is much less law in the  partnership area, and what is murky in the  corporate setting is even more opaque in the  partnership setting.

This report examines what law there is in the partnership area. It considers what factors should (and should not) be relevant to a debt-equity determination in the partnership context, with the ultimate goal of envisioning legal arrangements that can be structured with confidence that they will be characterized the desired way.


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Reproduced with permission from Tax Notes, July 10, 2017.

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