Upstream surplus reserve rules do not adequately address blocking deficits

In the most recent comment (in 2007) of CRA on partnerships governed by the Delaware Revised Uniform Partnership Act, it indicated that it still considers their proper characterization to be an open question, so that effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.

As for Florida and Delaware LLPs and LLLPs, an examination of the governing law of, for example, a Florida LLLP indicates that it “is formed, exists, and is dissolved by a virtue of the contractual arrangements between two or more persons instead of being a legal person formed and dissolved only by state action,” so that CRA does not appear to have been compelled to conclude that it is a corporation.

The s. 90(9) reserve permitting a Canco to utilize available surplus to shelter an upstream loan to it does not adequately address blocking deficits. For example, if FA Opco with exempt surplus of $300 and held by FA Holdco with an exempt deficit of $100, makes two successive loans of $100 to Canco (Holdco’s parent), no reserve would be available to Canco because, each time, the $100 deemed exempt surplus dividend received by Holdco would merely eliminate its exempt deficit – notwithstanding that the consolidated surplus equals the loan amounts.

Neal Armstrong. Summaries of Michael N. Kandev and Sandra Slaats, "Recent Developments in the Foreign Affiliate Area," 2015 Annual CTF Conference paper under s. 248(1) - corporation, s. 96, and s. 90(9).