Aggregate and Entity Approach in Partnership Taxation

Taxing regimes of the United States are divided into three categories,that is, taxation for corporation, partnership and individual. Because S corporation and limited liability company (LLC) are basically taxed through partnership taxation, a lot of taxable entities are regulated under this taxation. It is difficult to apply because the Internal Revenue Code(I.R.C.) has only 36 sections about that, but related regulations are provided over about 250 pages. Partnership taxation is supported by two theories, that is, aggregate theory and entity theory. Aggregate theory is a kind of theory that states that partnership is only equal to the aggregate of partners. According to this theory, each partner is finally responsible for tax liability. In contrary, entity theory is a kind of theory that states that partnership exists separately regardless of its partners. Partnership taxation is basically based on aggregate theory. However, because it is not easy to establish a taxation system only with aggregate approach, both theories are included in a lot of provisions. So, to summarize key points of partnership taxation from the standpoint of aggregate and entity approach is helpful to understand. This is also helpful when we need to revise the provisions. Especially, because partnership taxation was enacted as a title of “Special Taxation for Partnership Firms” and has been effective since 2009 in South Korea, it is a task of great significance at this time to review the partnership taxation horizontally according to both theories. In this article, I would like to review and compare the legal attitude of U.S. law with Korean’s with respect to aggregate theory and entity theory in partnership taxation.