Washington, D.C. (November 25, 2025) – In a letter sent to the Multistate Tax Commission (MTC) and related work group on the State Taxation of Partnerships, the American Institute of CPAs (AICPA) offered additional clarification and feedback on several points raised by the work group in the response to our previous letter and the updated MTC draft white paper on state tax sourcing of partnership income under the pass-through tax system and the blended apportionment method.
The AICPA’s letter offers recommendations regarding the approach of the MTC white paper on partnership structures, special allocations, related-party transactions, the effect on the ability of states to tax partnership income, and the determination of how partnership income is sourced. The letter’s general recommendation asks for definition of which rules partnerships should apply when computing entry-level taxes.
More specific recommendations include:
Update footnote language regarding states not applying the same approach to sourcing multistate income of a business regardless of form of business.
Add language to address where states have sourcing rules for income of businesses that are fundamentally different for nonresident or corporate partners.
Clarify in example 3 why the sourcing rules are applied at the partner level rather than the partnership level.
Add the DC Circuit Court’s recent Rawat v. Commissioner of Internal Revenue decision regarding the appropriate law for determining the character of a partner’s gain on disposition of their interest in the partnership.
Apply the alternative approach only when there is evidence the original transfer was intended to evade tax regarding transactions between partners and partnerships or other related entities.
Provide guidance regarding transactions involving partners or shareholders who act outside their capacity as partners or shareholders to clarify the reason for the difference in treatment for partnerships versus corporations.
Add a step or consideration to the framework to first determine if the taxpayer is carrying on a trade or business before determining whether it is unitary.
Add language noting that the state sourcing rule should not automatically assume the partnership is engaged in a business activity that gives rise to apportionable income.
Allow taxpayers to have the flexibility to apply the item-based approach as an alternative approach in addition to allowing the distributive share-based approach for determining the share of a partner’s apportionment factors.
Remove the phrase “while not clearly required for blended apportionment” from the statement on the unitary business principle.
“Taxpayers and practitioners face much complexity with partnership structures, special allocations and related-party transactions,” said Ning Yim, Senior Manager for Tax Policy & Advocacy with the AICPA. “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.”
About the American Institute of CPAs
The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with 397,000 members and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting. A founding member of the Association of International Certified Professional Accountants, the AICPA sets ethical standards for the profession, attestation standards, and U.S. auditing standards for private companies, not-for-profit organizations, and federal, state, and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, partners across the profession to build future talent, and drives continuing education to advance the vitality, relevance, and quality of the profession.
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Contact: Veronica L. Vera
202-434-9215
Veronica.Vera@aicpa-cima.com