San Diego Law Review

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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 one of three legal fictions elected 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 the existing part-form, part-fiction regime, but also rationalizes the use of form and fiction in the tax analysis of substantively equivalent partnership transactions.

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