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Partnership Characteristics: Confusion Reigns

Recent litigation has put into question the tests for determining the validity of a partnership and one’s status as a partner. The seemingly simple questions of whether, for tax purposes, a partnership exists and whether one is a partner require thoughtful, and sometimes complex, analysis to answer. There are two recognized tests for determining whether a partnership exists or whether one is a partner, but what remains uncertain is how these tests relate to each other. Whether applying the subjective test under Culbertson, or the objective test under Section 704(e), the Castle Harbour cases have thus far made clear that where a purported partner’s upside and downside are de minimus, such “partner” will not be respected as such for tax purposes.