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New Regulations Raise Critical Issues Concerning a Partner’s Share of Liabilities and Partnership Disguised Sales  

Author:  Jeffrey J. Bryant.

Source: Volume 34, Number 04, Summer 2017 , pp.3-24(22)

Journal of Taxation of Investments

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New Treasury Department guidance has changed the tax landscape for leveraged partnerships. Recently released regulations modify the approach to disguised sales in several important ways. They reduce the benefits available from the reimbursement of preformation capital expenditures exception to disguised sale treatment, particularly when qualified liabilities are transferred to the partnership. In addition, temporary regulations significantly restrict partners’ ability to adjust their shares of partnership liabilities with guarantees and other payment obligations in the context of the disguised sale rules. The new regulations would also transform the allocation of partnership liability process in general. Bottom dollar payment obligations now have no effect on partners’ share of liabilities. Beyond this specific type of obligation, newly proposed regulations introduce a list of factors that will be used to determine whether any payment obligation is recognized as a valid liability under Section 752. As this article explains, partnership structures for holding investments must be adapted to achieve the desired results under these rules.

Keywords: partnership recourse liabilities, partnership nonrecourse liabilities, disguised sales, preformation capital expenditures, bottom dollar payment obligations, partnership distributions, gain recognition

Affiliations:  1: Wichita State University.

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