Tax Planning for Contributions of Property To Partnerships

Originally published June, 2003

Partnership Disguised Sale Rules: Final Regulations to Section 707(a)(2)

1. Under the general rules of sections 721 and 731 of the Internal Revenue Code of 1986, as amended (the "Code"), contributions of property to and distributions of property from a partnership are not generally taxable to either the partnership or its partners. However, as part of the Deficit Reduction Act of 1984, Congress enacted section 707(a)(2)(B).
2. Section 707(a)(2)(B) provides that under regulations prescribed by the Secretary, if:
   

1. there is a direct or indirect transfer of money or other property by a partner to a partnership;



2. there is a related transfer of money or other property by the partnership to such partner (or another partner); and



3. such transfers shall be treated either as a transaction between the partnership and one who is not a partner or as a transaction between 2 or more partners acting other than in their capacity as members of the partnership.

3. After nearly seven years, proposed regulations were published under section 707(a)(2) on April 25, 1991. See 56 Fed. Reg. 19,055-02 (Apr. 25, 1991).

4. The final regulations were published on September 30, 1992. See 57 Fed. Reg. 44,974- 01 (Sept. 30, 1992).

5. The regulations are discussed below in addressing the following:

1. Simultaneous transfers;
2. Nonsimultaneous transfers;
3. Mixing-Bowl transactions;
4. Contributions of encumbered property—treatment of qualified liabilities;
5. Contributions of encumbered property—treatment of nonqualified liabilities;
6. Guaranteed payments, preferred returns, and operating cash flow distributions;
7. Guaranteed payments and service partner;
8. Preferred return and pledge of partnership interest;
9. Use of cross-allocation only;
10. Treatment of transferees;
11. Preformation expenditures; and
12. Wrap-around contributions.

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