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IF YOUR PARTNER IS YOU, ARE YOU A PARTNER AT ALL?

August 02, 2004

No, we aren't talking about whether the institution of marriage has been extended to imaginary friends.

The Treasury introduced the concept of "disregarded entities" into the tax law a few years ago, and the metaphysical implications continue to reverberate. A "disregarded entity" exists for state law purposes - it can be sued, for example - but it is not considered a separate entity from its owner under the tax law. Single-member limited liability companies and qualified Subchapter-S subsidiaries are common examples.

Last week the Treasury issued a ruling (Rev. Rul. 2004-77) discussing whether an entity can form a partnership with its own disregarded entity. The fact pattern had a corporation forming a partnership with its own wholly-owned LLC as the other partner. The ruling holds that the partnership is not a partnership at all, but is instead another disregarded entity, taxed as on the corporate "partner's" return.

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