Originally published June, 2003
Partnership Disguised Sale Rules: Final Regulations to Section 707(a)(2)
- Under the general rules of sections 721 and 731 of the Internal Revenue Code of 1986, as amended (the "Code"), contributions of property to and distributions of property from a partnership are not generally taxable to either the partnership or its partners. However, as part of the Deficit Reduction Act of 1984, Congress enacted section 707(a)(2)(B).
- Section 707(a)(2)(B) provides that under regulations prescribed by the Secretary, if:
- there is a direct or indirect transfer of money or other property by a partner to a partnership;
- there is a related transfer of money or other property by the partnership to such partner (or another partner); and
- such transfers shall be treated either as a transaction between the partnership and one who is not a partner or as a transaction between 2 or more partners acting other than in their capacity as members of the partnership.
- After nearly seven years, proposed regulations were published under section 707(a)(2) on April 25, 1991. See 56 Fed. Reg. 19,055-02 (Apr. 25, 1991).
- The final regulations were published on September 30, 1992. See 57 Fed. Reg. 44,974- 01 (Sept. 30, 1992).
- The regulations are discussed below in addressing the following:
- Simultaneous transfers;
- Nonsimultaneous transfers;
- Mixing-Bowl transactions;
- Contributions of encumbered property—treatment of qualified liabilities;
- Contributions of encumbered property—treatment of nonqualified liabilities;
- Guaranteed payments, preferred returns, and operating cash flow distributions;
- Guaranteed payments and service partner;
- Preferred return and pledge of partnership interest;
- Use of cross-allocation only;
- Treatment of transferees;
- Preformation expenditures; and
- Wrap-around contributions.
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