IRS Issues Proposed Regulations on Partnership Transfers

The Treasury Department and the Internal Revenue Service last week issued proposed regulations providing guidance for determining when a transfer of consideration to a partnership by a partner and a transfer of consideration from that partnership to a different partner constitute a disguised sale of a partnership interest.

These proposed regulations are intended to provide guidance regarding disguised sales of partnership interests. Generally, the proposed regulations follow the model provided in the existing regulations under § 707 governing disguised sales of property between partners and partnerships. In particular, the proposed regulations provide, generally, that where a transfer of consideration to partner A by a partnership would not have happened “but for” the transfer of consideration to the partnership by partner B, the transfers are treated as a sale of all or a portion of partner A’s interest in the partnership to partner B for all purposes under the Internal Revenue Code.

Where the transfers to and from the partnership do not occur on the same date, the transfers are treated as a sale only if the later transfer is not dependent on the entrepreneurial risks of partnership operations. The proposed regulations provide that these determinations are made based on all of the facts and circumstances.

“These proposed rules benefit both the taxpaying community and the Internal Revenue Service,” said IRS Chief Counsel Don Korb. “The rules provide taxpayers and tax practitioners with guidance on how to structure partnership contributions and distributions without getting caught up in the disguised sale rules. They also provide for a longer disclosure period that will facilitate the examination of questionable transactions involving partnerships.”

The proposed regulations incorporate the timing presumptions of the existing regulations under § 707, but also provide additional presumptions and exceptions for transactions that are unlikely to constitute disguised sales of partnership interests. The proposed regulations include detailed rules for determining what constitutes a transfer of consideration, including whether and to what extent the shifting or assumption of liabilities, including partnership liabilities, among partners and the partnership constitutes a transfer of consideration. An anti-abuse rule is also provided.

In response to a recommendation of the Joint Committee on Taxation in its "Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (February 2003)", the regulations generally would extend the existing disclosure requirement for disguised sales of property from two years to seven years. The same disclosure requirement would be incorporated for disguised sales of partnership interests.

The preamble to the proposed regulations states that the Treasury Department and the Internal Revenue Service also plan to review the existing regulations under §707 for deficiencies and technical ambiguities and to amend those regulations as necessary before these proposed regulations are issued as final regulations.

You may like these other stories...

Hertz and Icahn make peaceThere won’t be any nasty, protracted proxy battle between Hertz Global Holdings and activist investor Carl Icahn. The rental car chain agreed last Thursday to give Icahn – who has...
For bitcoin users, the taxman cometh. And you best know how to calculate taxes owed on what the IRS calls convertible virtual currency.In March 2014, the IRS issued Notice 2014-21, which declares virtual currency will be...
Majority of House of Representatives urges leadership to preserve cash method of accounting for tax purposesA bipartisan majority of the House of Representatives – 233 members – has signed a letter urging House...

Already a member? log in here.

Upcoming CPE Webinars

Sep 18
In this course, Amber Setter will shine the light on different types of leadership behavior- an integral part of everyone's career.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.