The PSA has been audited by the IRS and California Franchise Tax Board eleven times since 2014. Every single audit concluded with no changes, no penalties, and no disallowances — at the federal, state, and appellate levels.
Auditors examined whether the special allocation of losses to the Majority Member had "substantial economic effect" — including capital account maintenance, liquidation distributions, and the deficit restoration obligation. All requirements were satisfied.
The structure was tested for both meaningful change in economic position and a substantial non-tax purpose. The trading partnership's real activity and the client's genuine capital contribution satisfied this standard.
Auditors confirmed that the Majority Member's unconditional obligation to restore any capital account deficit satisfies the at-risk rules for loss deductibility — a key structural requirement built into every operating agreement.
The non-passive classification of trading partnership losses was examined at both the 1040 and partnership levels. In every instance, auditors confirmed that losses flow directly to offset income without the passive activity limitation.
A general legal opinion from qualified tax counsel is available for client review. The opinion addresses the federal tax treatment of the PSA structure, IRC §704(b) compliance, economic substance, at-risk rules, and passive activity classification.
For clients who require a written legal opinion specific to their individual transaction, we can facilitate engagement with AmLaw 100-ranked law firms with California offices. This is the only cost not embedded in the standard PSA funding.
Most tax strategies come with verbal assurances. The PSA comes with a documented audit history, codified legal authority, and access to independent counsel. You have options that go far beyond trusting someone's word.
Eleven times the IRS or California FTB looked at the PSA. Eleven times they walked away with nothing changed. That is a track record built in the real world.
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