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Disguised-sale partnership regs. withdrawn

By Sally P. Schreiber, J.D.

Please note: This item is from our archives and was published in 2018. It is provided for historical reference. The content may be out of date and links may no longer function.

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In REG-131186-17, the IRS announced that it is withdrawing the temporary regulations issued in T.D. 9788, which addressed the allocation of partnership liabilities for disguised-sale purposes (the Sec. 707 temporary regulations) and proposing to reinstate the prior regulations under Regs. Sec. 1.707-5(a)(2). The IRS, however, announced that it is keeping the regulations on bottom-dollar guarantees that were also issued as part of T.D. 9788.

The regulations are being withdrawn in response President Donald Trump’s Executive Order 13789, after the IRS earlier recognized them as burdensome and said they would be removed (Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (Oct. 2, 2017, available at www.treasury.gov)).

Under old Regs. Sec. 1.707-5(a)(2), to determine a partner’s share of liabilities for disguised-sale purposes, the regulations prescribe separate rules for a partnership’s recourse liabilities and for a partnership’s nonrecourse liabilities.

Under the Sec. 707 temporary regulations, liabilities generally are allocated in the same manner as excess nonrecourse liabilities, subject to certain restrictions (see withdrawn Temp. Regs. Sec. 1.707-5T(a)(2)). This generally results in liabilities being allocated, for disguised-sale purposes, in accordance with each partner’s interest in partnership profits.

The IRS is proposing to remove the Sec. 707 temporary regulations 30 days after the new regulations are adopted as final. The amendments to Regs. Sec. 1.707-5 are proposed to apply to any transaction for which all transfers occur on or after the date they are published as final. Partners and partnerships may rely on the rules in these proposed regulations in lieu of the Sec. 707 temporary regulations for any transaction in which all transfers occur after Jan. 3, 2017.

The IRS is requesting comments on the proposed regulations by July 19 and has scheduled a public hearing in Washington on Aug. 21. The IRS is also separately requesting comments on the approach it adopted in the Sec. 707 temporary regulations.

— Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.