According to Law360 the Internal Revenue Service’s recently issued regulations governing the tax treatment of disguised property sales within partnerships are expected to reduce flexibility for businesses in how they manage debt and close certain tax planning avenues for managing losses and liabilities.
The agency released its final rules this month, nearly three years after first proposing them in January 2014, to clarify ambiguities in how disguised property sales between individuals in partnerships will be treated and how distributions that reimburse partners for the partnership’s borrowing should be handled.
While a partner's property contributions to a partnership are generally tax-free, if such a transfer can be characterized as a sale or exchange of property, it is considered to be a disguised sale of property and is taxable.
Under the old rules, a transaction in which a partner contributed property to a partnership, and the partnership made distributions to the partner from borrowed money, was not considered a taxable disguised sale if the distribution was the same as the partner’s share of debt.
The agency released its final rules this month, nearly three years after first proposing them in January 2014, to clarify ambiguities in how disguised property sales between individuals in partnerships will be treated and how distributions that reimburse partners for the partnership’s borrowing should be handled.
While a partner's property contributions to a partnership are generally tax-free, if such a transfer can be characterized as a sale or exchange of property, it is considered to be a disguised sale of property and is taxable.
Under the old rules, a transaction in which a partner contributed property to a partnership, and the partnership made distributions to the partner from borrowed money, was not considered a taxable disguised sale if the distribution was the same as the partner’s share of debt.
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