20 October 2016
New Regulations Significantly Change Partnership Disguised Sale and Debt Basis Rules
New final, temporary, and proposed regulations drastically change the way partnership debt is treated for Code Section 707 "disguised sale" purposes and section 752 basis purposes. The primary changes in the regulations are:
- The effective elimination of a partner's ability to use a guarantee to avoid disguised sale gain on a debt-financed distribution;
- A heightened anti-abuse rule to challenge section 752 tax basis allocations from partner guarantees;
- A nearly complete denial of tax basis allocations from a so-called "bottom dollar guarantee"; and
- A series of "clean up" changes to the mechanics of the disguised sale rules and their exceptions, including the denial of benefits of an overlapping qualified liability and reimbursement for pre-formation expenditure exception.