Isaac Grossman Examines Whether “Flash” Ownership Creates Tax Risk for Private Equity Funds

Partner Isaac Grossman, chair of Morrison Cohen’s Tax Practice, authored an article for Bloomberg Tax titled “Does Flash, Momentary Ownership Matter for Private Equity Funds?” The piece examines whether a holding partnership's transitory, or “flash,” ownership of rollover assets or equity creates hidden tax risk for tax-sensitive fund investors.

Private equity sponsors typically use a partnership-above-corporation structure for platform investments, and in many add-on deals a seller’s rollover assets or partnership interest pass through that holding partnership for only a moment before landing in the operating corporation. Accounting firms generally treat fleeting ownership as generating no reportable income, but Isaac notes that the bigger exposure may lie elsewhere: IRC §875 attributes a partnership's trade or business activity, not just its income, to its partners, raising filing obligations for foreign investors and commercial-activity risk for sovereign wealth funds under §892.

Isaac breaks down how the analysis shifts depending on what's being rolled over:

Partnership Interests: When the rollover involves a partnership interest, §706's calendar-day convention suggests the full day's activity may belong to the seller alone, with nothing attributed to the momentary holding partnership.

Business Assets: When operating assets are involved, the benefits-and-burdens-of-ownership test allows the closing date to be split, so sponsors can time the purchase agreement to push that transfer later in the day and narrow the partnership's exposure.

Existing Authority: Treasury regulations and IRS rulings on public-offering underwriters, partnership mergers and divisions, and Subchapter S disqualification cases consistently disregard truly transitory ownership, though none directly resolves the PE question.

Isaac highlights the resulting tension: sellers want that momentary ownership respected to preserve tax-free treatment under §721 and §351, while the fund wants it disregarded to shield tax-sensitive investors from CAI, ECI and UBTI. Some sponsors sidestep the conflict with a two-step structure, routing the contribution through a new corporation first, though that approach carries its own unresolved tax risk.

Isaac concludes that the tax risk doesn't disappear, it simply shifts between buyer and seller, making careful structuring essential to any add-on deal.