Fiction, Form and Substance in Subchapter K -- Approaching Partnership Mergers, Divisions and Incorporations


The tax consequences of substantively equivalent partnership mergers, divisions and incorporations can vary dramatically depending on the form of the transaction. This disparate treatment arises because the tax analysis of these partnership transactions inconsistently adheres to the “form” of the transaction and limits the use of legal “fictions”. This part-form, part-fiction approach distorts parties’ incentives about whether and how to undertake such transactions and can make the transactions less efficient, all without materially advancing other policy goals. This result is exacerbated by non-tax business exigencies that restrict parties’ abilities to implement certain transaction forms and by the increase in “formless” transactions. In order to treat substantively equivalent transactions similarly, this article proposes the adoption of a uniform regime in which the tax consequences of partnership mergers, divisions and incorporations are determined based on the legal “fiction” elected (from up to three choices) by the parties, regardless of the “form” in which the transaction is implemented. The proposed approach not only remedies the problem of disparate treatment and addresses the policy concerns raised by existing part-form, part-fiction regime, but also rationalizes the use of “form” and “fiction” in the tax analysis of substantively equivalent partnership transactions.


Business Organizations Law | Organizations Law | Taxation-Federal | Tax Law

Date of this Version

September 2006