The Distinction Between Partnership Debt and Partnership Equity
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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