Subchapter K is where a fund's economics are made or unmade. Allocations, carried interest, blocker and feeder layers, and the audit regime are all drafted into the partnership agreement before the first capital call.
A partnership files a return but pays no tax; the partners do, on whatever the agreement allocates to them, distributed or not. The allocation is therefore the tax plan, and the Code respects it only if it has substantial economic effect or tracks the partners' interests in the partnership. The first means capital accounts kept to the regulations, liquidation by those accounts and a deficit-restoration obligation or qualified income offset; the second is what a targeted allocation leans on.
A tax-exempt investor wants a blocker between itself and debt-financed or operating income; a non-United States investor wants one between itself and effectively connected income, and otherwise faces ten percent withholding on the proceeds of selling its interest. The sponsor's carried interest keeps long-term capital gain character only on assets held more than three years. The audit regime adopted in 2015 assesses at the partnership level unless the partnership elects, within forty-five days of the final adjustment, to push it out to the partners of the reviewed year.
We draft the agreement with the regulations open and represent clients in matters before the IRS when an allocation is examined.
Drafting the allocation provisions of partnership and LLC agreements, with targeted and layered allocations, capital-account maintenance, and substantial-economic-effect mechanics, so the tax tracks the deal economics the partners agreed.
Structuring the profits interest, management-company, and general-partner entities for fund sponsors, documented consistent with current law, including the three-year holding-period rules, so the carry arrangement is defensible if examined.
Designing blocker corporations and feeder partnerships to manage UBTI for tax-exempt investors and effectively-connected-income exposure for non-U.S. investors, weighed against the entity-level tax cost they carry.
Building the centralized partnership audit regime into the agreement, through partnership-representative appointment, push-out elections, and indemnities, so audit exposure is allocated deliberately among the partners before any notice arrives.
Advising on Schedule K-1 reporting and the withholding obligations attaching to foreign partners and to transfers of partnership interests, including withholding on dispositions by non-U.S. partners, built into the structure from the outset.
Tax planning for admissions and redemptions, distributions in kind, partnership mergers and divisions, basis adjustments, and dissolution, the events that move value through a partnership and trigger its most consequential tax decisions.
A partner who contributes appreciated property is allocated its built-in gain when the partnership sells it, and the agreement must choose how: the traditional method, traditional with curative allocations, or remedial. The choice decides who bears the tax on depreciation shortfalls for years. Each new closing revalues the book and creates the same layers again.
An interest granted for services is not taxed on receipt if it is a profits interest, one that would receive nothing in a liquidation on the grant date, and is held two years. A protective section 83(b) election within thirty days covers an unvested grant. A capital interest is compensation the day it vests.
A section 754 election adjusts the basis of partnership assets when an interest is sold or property distributed, so a buyer of an interest gets the benefit of its price. It is made on a timely return for the year of the transfer and binds every year after unless revoked with consent. Secondary buyers check.
A partnership with one hundred or fewer partners, none of them a partnership, trust or disregarded entity, may elect out of the centralized audit regime on each year's timely filed return, so adjustments are made at the partner level. One ineligible partner anywhere removes the option. Where available, it is made every year, on purpose.
A partnership with effectively connected income pays withholding on each foreign partner's share at the highest applicable rate, in quarterly installments, distributed or not, and reports it on Forms 8804 and 8805. International items also run through Schedules K-2 and K-3. A blocker above the partnership moves the obligation; it does not end it.
A partnership return is due the fifteenth day of the third month after year end, March 15 for a calendar year, extendable six months to September 15. Every investor's return waits on the K-1, and a fund that delivers in September breaks a promise every year, so the reporting covenant carries a date.
Before the LPA is drafted, we map the waterfall to Subchapter K: who blocks, who feeds, where the carry sits, and which jurisdiction each layer takes. Tax-exempt and non-U.S. commitments in the pipeline decide the blocker and feeder geometry before the first close.
The partnership agreement becomes the tax plan: targeted allocations, capital-account maintenance, the sponsor's profits interest documented against the three-year holding-period rules, and the audit regime, with its partnership representative, push-out election, and indemnities, written in before anyone signs.
Closings, subsequent admissions, and portfolio exits each reopen the math: revaluations and book-ups, basis adjustments on transfers, withholding on foreign partners and on dispositions of interests, and K-1s that reconcile to the waterfall every year the vehicle lives.
If the IRS examines, the regime the agreement chose does the work, push out or pay at the entity, and the allocation file is already written to be read. At dissolution, final allocations, in-kind distributions, and the closing K-1s land where the term sheet said they would.
A partnership pays no tax, which is why its agreement is the most consequential tax document you will ever sign.
Partnership and fund tax is the body of rules under Subchapter K of the Internal Revenue Code that governs how partnerships, LLCs taxed as partnerships, and the private funds built on them allocate income, gain, loss, and deductions among their partners. Because a partnership is a pass-through that pays no entity-level tax, the economics agreed in the partnership agreement and the tax allocations that track them have to be drafted together, with the K-1 reporting and withholding that follow.
At the term-sheet stage, before the partnership or limited partnership agreement is drafted. The allocation waterfall, the carried-interest mechanics, the use of a blocker or feeder, and the choice of jurisdiction are structural decisions that determine the tax outcome for every partner, and they are far easier to design in than to amend after capital has closed and the first K-1s have gone out.
Carried interest is the share of fund profits allocated to the sponsor as a partnership interest rather than a fee, and its character and holding-period treatment turn on how the interest is granted and held. We structure the profits interest, document it consistent with current law including the three-year holding-period rules, and coordinate the sponsor's management-company and general-partner entities so the arrangement is defensible if examined. We do not promise a particular tax rate, which depends on facts and law that change.
Blocker corporations and feeder vehicles are entities inserted into a fund structure to manage the tax position of particular investors: tax-exempt investors concerned with unrelated business taxable income, and non-U.S. investors concerned with effectively connected income and U.S. filing obligations. We design the blocker and feeder layers, weigh the entity-level tax cost against the investor benefit, and align them with the fund's overall allocation and reporting plan.
Under the centralized partnership audit regime introduced by the Bipartisan Budget Act of 2015, the IRS can assess and collect tax at the partnership level rather than from individual partners, which shifts real economic exposure onto the partnership and its current owners. We build the regime into the partnership agreement through the partnership-representative appointment, push-out elections, and indemnity provisions, so the audit risk is allocated deliberately.
Yes. We advise on the Schedule K-1 reporting that allocates each partner's share of income and on the withholding obligations that attach to foreign partners and to dispositions of partnership interests, including the rules requiring withholding on transfers by non-U.S. partners. Cross-border partnerships carry full U.S. reporting, and we build those obligations into the structure from the outset, long before filing season.
Tax structuring for business combinations, asset and stock acquisitions, carve-outs, and corporate restructurings, drafted into the deal terms so the structure holds at signing.
Explore →International tax strategy for multinational businesses and investors, covering treaty positions, structuring, and U.S. reporting obligations including FATCA and FBAR.
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Explore →Tax planning for real estate transactions and investment partnerships, including 1031 exchanges, alongside property tax assessment appeals and valuation disputes.
Explore →Reviewed by Jonathan D. Herpy, Sr., Senior Partner · Last updated October 2026 · Educational overview · Not legal advice
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