Author Archives: Christopher Alan Cunningham

Defective and Reverse Morris Trust Transactions in the Wild

When one corporation (“Parent”) distributes the stock of a subsidiary (“Sub”), normally both Parent and its shareholders are taxed: Parent on the gain (fair value minus basis) in the Sub shares distributed, and the shareholders for receiving a dividend.  But, if Parent (1) controls (defined technically) Sub before the transaction, (2) distributes a controlling interest in the transaction, (3) has a corporate business purpose for the transaction, Continue reading

Withdrawing Partner Allocations: Stuffing and Targeting

I recently read an interesting article by Andrew Needham of Cravath’s New York office on “stuffing allocations,” a common practice to use withdrawing partners to “soak up” income from other partners.  

I’ve been playing with allocations to withdrawing partners recently because the various “typical” target allocation provisions out there seem to fall apart around partner withdrawal.  In short, if target allocations do a year-end (or period-end in some more savvy versions) allocations based on aiming for the economics of a hypothetical liquidation, how do you handle a partner that withdrew?  He’s not entitled to the hypothetical “liquidating distributions,” so seems to get missed by many target allocations provisions.  

I’ve been playing with various ways to solve the problem (and whether there really is a problem in the first place).  None of those options have involved “stuffing allocations” technique, which has been an oversight on my part.  This is something I’m trying to address for the next version of my paper on drafting partnership distribution and allocation provisions.


Download Thomason and Cunningham, Drafting of Cash Distribution and Tax Allocation Provisions, UT Law CLE LLCs, LPs and Partnerships, July 11, 2013 here: [paper] [presentation]

Download Needham, The Problem With Stuffing Allocations, , 141 Tax Notes 737 (Nov. 18, 2013) from SSRN here:

IRS can now decline a ruling for “resource constraints”

Every year, IRS revenue procedure number three lists the IRS’s “no rule” areas. These are areas where the IRS will decline to issue private letter rulings. Some are areas of legal contention, others are areas with too many factual issues for a ruling to be worth the effort (as they can be overturned for material factual inaccuracy).

This year, Rev. Proc. 2014-3 added new grounds for declining to issue a ruling: “resource constraints.” Section 3.02(10) of Rev. Proc. 2014-3 reads:

“(10) Questions that the Service determines, in its discretion, should not be answered in the general interests of sound tax administration, including due to resource constraints.”

“Sound tax administration” has long been grounds to decline a ruling, but the “including due to resource constraints” language is new.  The Rev. Proc. goes on to say that if it declines in an area for “resource constraints,” it will similarly treat other taxpayers with the same issue.

“If the Service determines that it is not in the interest of sound tax administration to issue a letter ruling or determination letter due to resource constraints, it will adopt a consistent approach with respect to taxpayers that request a ruling on the same issue. The Service will also consider adding the issue to the no rule list at the first opportunity.”

I’ve seen response times all across the IRS going way up lately, so I shouldn’t be surprised. At the same time, this seems to be sacrificing the efficient operating of our tax system for a short-term savings. Decreased rulings means more and more expensive tax controversy later. The reason private letter rulings exist is because it is cheaper in the long run if the IRS and taxpayers can handle complex issues in advance in a less adversarial process than administrative controversy and litigation.

Rev. Proc. 2014-3 can be downloaded from the IRS’s website here: