The Treasury Department issued new regulations in October 2016 that modify a number of the partnership debt allocation rules. One important aspect of these regulations, discussed in our last column, disregards so-called “bottom guarantees” for purposes of allocating partnership liabilities among the partners of a partnership. The new regulations take an even more drastic approach, though, with respect to determining a partner’s share of partnership liabilities for purposes of the “disguised sale” rules—and in a surprising twist cause some partnership liabilities to not be included in any partner’s share.
Background
A contribution of property to a partnership is generally tax-free, and a distribution of money by a partnership to a partner is generally tax-free to the extent of the partner’s basis in its partnership interest. However, if a partner contributes property to a partnership and the partnership distributes money to the partner within a two-year period, there is generally presumed to be a sale of property by the partner to the partnership (a “disguised sale”). The contribution of property to a partnership subject to debt can also result in a disguised sale under certain circumstances.
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