ABSTRACT
Complexity is often associated with the flow-through tax treatment of partnerships. The chapter discusses how partnership tax has attempted to account for the complex nature of partnerships and provide a regime that does not unduly interfere with the economic arrangements of partners. Integration has definite economic benefits, but it also may give rise to agency costs. Congress could simplify the tax rules by repealing the requirement that allocations have substantial economic effect, and the Internal Revenue Service could still challenge abusive tax allocations. Tax law must recognize the parties' economic arrangement and that, in many situations, the arrangement makes tracing economic items from a source to the contributor of a specific resource extremely difficult, if not impossible. Economic theory suggests that individuals form partnerships to increase productivity and reduce rent-seeking behavior. The economic study of partnerships reveals that partners apportion partnership income and loss to achieve economic goals, such as reducing agency costs.
