The American Institute of CPAs (AICPA) has submitted additional clarification and feedback on sourcing rules for partnership income to the Multistate Tax Commission (MTC) and its working group examining the state taxation of partnerships.  

The letter addresses issues and questions raised by the group in response to previous AICPA correspondence, as well as the latest draft of the MTC’s white paper on state tax sourcing of partnership income, pass-through tax system processes, and blended apportionment methods. 

The AICPA has suggested several adjustments to the current draft white paper, focusing on how partnership structures, special allocations, and related-party transactions are treated within the context of state tax.  

The letter notes concerns about the impact these rules may have on the ability of states to tax partnership income and on determining how such income is sourced.  

The general request is for a clear definition of which guidelines partnerships should follow when calculating entry-level taxes. 

Specific points raised include revising a footnote regarding how different states approach sourcing multistate business income according to the form of business.  

The letter also recommends to add language to address cases where states’ sourcing rules for business income differ fundamentally for non-resident or corporate partners. 

The letter recommends further clarification on why sourcing guidance is applied at the partner level rather than at the partnership level.  

It suggests to add the DC Circuit Court’s recent decision in Rawat v Commissioner of Internal Revenue, which relates to determining the nature of a partner’s gain when disposing of an interest in a partnership. 

On related-party transactions between partners and partnerships or other related entities, AICPA indicates that an alternative approach should only apply if there is evidence that a transfer was intended to avoid taxation.  

It requests additional guidance for instances where partners or shareholders act outside their official capacities.  

Another recommendation is to enhance the framework by first establishing whether a taxpayer operates a trade or business before determining if it constitutes a unitary business.  

The letter also calls for removal of the phrase “while not clearly required for blended apportionment” in reference to the unitary business principle from the white paper. 

AICPA Tax Policy & Advocacy senior manager Ning Yim said: “Taxpayers and practitioners face much complexity with partnership structures, special allocations and related-party transactions.  

“In addition, the effect on the ability of states to tax partnership income and the determination of how partnership income is sourced is a challenge. Accordingly, we offer additional recommendations regarding the approach of the MTC white paper on these issues.”