Proposed regulations issued by the IRS would eliminate the de minimis partner rule by removing Reg. §1.704-1(b)(2)(iii)(e) because the rule may have resulted in unintended tax consequences. Under the allocation rule of Code Sec. 704(a), a partner’s distributive share of income, gain, loss, deduction or credit is determined according to the partnership agreement. Code Sec. 704(b) limits the flexibility of this rule by requiring, in cases where the allocation does not have a substantial economic effect, that the allocation be in accordance with the partners’ interests in the partnership. Whether an allocation has a substantial economic effect is determined through a two-part analysis under Reg. §1.704-1(b)(2).
The de minimis partner rule provides that, for purposes of applying the substantiality rules, the tax attributes of de minimis partners (those who own less than 10 percent of the capital and profits of a partnership, and who are allocated less than 10 percent of each partnership item) need not be taken into account. However, the rule was not designed to produce certain outcomes, such as application to a partnership in which no partner meets these 10-percent qualifications. Therefore, the IRS has proposed eliminating the de minimis partner rule to avoid these unwanted effects.
Proposed Regulations, NPRM REG-109564-10, 2011FED ¶49,500
Code Sec. 704
CCH Reference – 2011FED ¶25,122N
Tax Research Consultant
CCH Reference – TRC PART: 21,200
CCH Reference - TRC PART: 21,304