Salient to Investors:

Congress is debating the biggest rewrite of US partnership rules in 60 years, which may increase taxes for real estate and finance businesses or prompt them to restructure operations to avoid new costs.

The Camp proposal would change the rules for businesses such as partnerships that don’t pay taxes at the corporate level and pass their income through to their owners’ individual tax returns.

Victor Fleischer at University of Colorado said pass-through entities have increasingly been used to facilitate aggressive tax gamesmanship.

CBO says pass-through entities accounted for 38 percent of business receipts in 2007 versus 14 percent in 1980. The IRS says 48 percent of partnerships in 2010 were in real estate, rental and leasing industries, and finance and insurance partnerships reported 48 percent of net income.

James Brown at Willkie, Farr & Gallagher said the proposal leans too far toward pushing people into an S corp structure that growing businesses don’t often use and make partnerships look too much like S corps, with their disadvantages.

Andrea Whiteway at McDermott Will & Emery says the transition rules will be absolutely impossible and crazy, and crazy for S corps.

Karen Burke at University of San Diego said if you get rid of special allocations, people would have to recreate them in other ways.

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