Cross References
- REG-131186-17, June 19, 2018

The IRS has issued new proposed regulations for allocating partnership liabilities for disguised sale purposes. IRC section 707(a)(2)(B) generally provides that related transfers to and by a partnership that, when viewed together, are more properly characterized as a sale or exchange of property, will be treated either as a transaction between the partnership and one who is not a partner, or between two or more partners acting other than in their capacity as partners. This type of transaction is referred to as a disguised sale. Proposed regulations were issued on January 30, 2014 to amend previous regulations under IRC section 707. Final and temporary regulations were then issued on October 5, 2016 that implemented a new rule concerning the allocation of liabilities for IRC section 707 purposes.

On April 21, 2017, the President issued an Executive Order on identifying and reducing tax regulatory burdens, which directed the IRS to review all significant tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate the burdens of regulations that impose an undue financial burden on taxpayers, add undue complexity to the tax laws, or exceed the statutory authority of the IRS.

As a result of the Executive Order, the IRS is proposing to remove the IRC section 707 temporary regulations that were issued in 2016 and reinstate the prior regulations concerning the allocation of liabilities for disguised sale purposes.

Under the new proposed regulations (based upon the prior regulations), a partner's share of a partnership's recourse liability equals the partner's share of the liability under IRC section 752. A partnership liability is a recourse liability to the extent that the obligation is a recourse liability under Regulation section 1.752-1(a)(1). A partner's share of a partnership's nonrecourse liability is determined by applying the same percentage used to determine the partner's share of the excess nonrecourse liability under Regulation section 1.752-3(a)(3). A partnership liability is a nonrecourse liability of the partnership to the extent that the obligation is a recourse liability under Regulation section 1.752-1(a)(2).

Author's Comment: The temporary regulations issued in 2016 contained a few extra rules in determining a partner's share of liabilities in a disguised sales transaction, thus making them a bit more complicated.

See printable version for remainder of the article.