Aggregate vs. Entity Approach Essay

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Lesson 1. Aggregate vs. Entity Approach
1. Aggregate approach: the partnership as a separate entity is disregarded and each partner is viewed as directly owning an undivided interest in the partnership's assets operations.
If the tax law used only aggregate concepts, the partnerships and their partners would be treated:
- Each partner would be taxed on share of partnership income and would be viewed as owning a direct interest in each partnership asset.
- Contributions and distributions would be viewed as taxable transfers.

2. The portions of Subchapter K that reflect the aggregation approach: taxation of partnership income to the partners and the nonrecognition provisions for contributions to and distributions from partnerships.
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- Partner has flexibility to withdraw or transfer his interest
- Partner can elect to adjust the bases of partnership assets in connection with certain distributions of assets and transfers.

6. Outside of Subchapter K, however, determining which of the two theories should apply is much more uncertain.
Provisions Outside of Subchapter K Certain provisions outside of Subchapter K affect the amount of loss that an individual partner can deduct in any given year. Two major provisions are the at risk limitations and passive loss rules which are next. At risk limitations Although a partner may have sufficient basis to claim a loss, at risk limitations may restrict a partner from deducting losses where there is no financial risk of loss. IRC Sec. 465(a) A partner's at-risk amount generally includes his adjusted basis in the partnership taking into account only those liabilities for which the partner has personal liability. This is in contrast to a partner's outside basis computation which may include the partner's share of all partnership liabilities without regard to any personal liability on the obligations, Thus, a partners outside basis may include both recourse and nonrecourse liabilities,

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