The Journal of Accountancy reports that the IRS issued proposed regulations in January dealing with disguised sales of property to or by a partnership under Sec. 707 and the treatment of partnership liabilities under Sec. 752 (REG-119305-11). According to the IRS, the proposed regulations are designed to address “deficiencies and technical ambiguities” in the current regulations.

Sec. 707 prevents partners from recharacterizing a sale or exchange of property as a contribution to the partnership followed by a distribution by the partnership, which could allow the partners to avoid or defer tax on the transaction. Instead, a partner’s transfer of property to a partnership followed by the partnership’s transfer of money or other consideration to the partner is treated as a sale of property to the partnership by the partner if, based on all the facts and circumstances, the payment of money or other consideration would not have been made but for the transfer of the property (a disguised sale). An entrepreneurial-risks test applies for nonsimultaneous transfers of property.

To read more, see New treatment of disguised sales and partnership liabilities.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.