New Restrictions on Tax Shelter Limited Partnerships

The Tax Reform Act of 1976 is the culmination of more than two years of work by both houses of Congress. The Act is the most extensive tax reform effort since the enactment of the 1954 Code. The changes made by the Act to the partnership provisions in subchapter K are the first substantive changes in this area since the subchapter\u27s enactment as a part of the 1954 Code. It is clear from the Act and the accompanying committee reports that the changes to Subchapter K were motivated by the wide use of tax shelter limited partnerships, which led Congress to believe that taxpayers abused some of the partnership provisions. Most of the changes made to Subchapter K are of a restrictive nature applicable to tax shelter limited partnerships. This comment discusses the substantive changes contained in the five subsections of section 213 of the Act. The first three subsections were intended to clarify issues which were uncertain under prior law, relating to special allocations, retroactive allocations, and guaranteed payments. The remaining two subsections narrow provisions of the prior law which were not unclear but which had been abused by taxpayers. These provisions deal with additional first-year depreciation and nonrecourse debt