No More Tiers: Rebuilding Auditability in Partnership Taxation

Authors

• Theodore P. Seto, Loyola Law School Los Angeles

Document Type

Article

Publication Date

7-16-2026

Abstract

Over the past two decades, large partnerships have proliferated and grown dramatically more complex, with ownership chains commonly extending ten, twenty, or more tiers. This complexity has rendered Subchapter K effectively unauditable: tracing allocations, basis, and liability shares across multiple interdependent entities requires simultaneous examination of every partnership above and below the audit target, often across jurisdictions and tax years. GAO and TIGTA reports confirm that audit rates for large partnerships have fallen near zero, that most audits yield no adjustments, and that the IRS lacks the capacity to enforce even the most basic rules of partnership taxation. The Article demonstrates that tiering creates exponential audit‑scope expansion, severe timing mismatches under § 706, and cascading basis effects under § 752, making meaningful enforcement practically impossible.

The Article proposes a categorical structural solution: prohibit entities from qualifying for partnership treatment if any of their interests are owned, directly or indirectly through disregarded entities, by partnerships. In short: no more tiers. This rule would restore the factual predicates assumed by Subchapter K’s drafters, reactivate the centralized audit regime enacted in 2015, and generate substantial revenue through both direct enforcement and deterrence. The Article concludes that a prohibition on partnership‑on‑partnership ownership can rebuild auditability, restore legal determinacy, and prevent the partnership tax system from devolving into what the Article describes as a “voluntary donation system.

Recommended Citation

Seto, Theodore P., "No More Tiers: Rebuilding Auditability in Partnership Taxation" (2026). Law Faculty Research and Publications. 20.
https://digitalcommons.lmu.edu/law_faculty_pub/20