Tuesday, April 26, 2005
The New York State Bar Association Tax Section has submitted a report to the IRS on Disguised Sales of Partnership Interests Responding to Reg-149519-03
This report responds to a Notice of Proposed Rulemaking (REG-149519-03) relating to the treatment of transactions between a partnership and its partners as disguised sales of partnership interests between the partners under § 707(a)(2)(B) (the "Proposed Regulations"). We submitted our Report No. 1027 (the "2003 Report") in response to the IRS's request, in Notice 2001-64, 2001-1 C.B. 316, for comments on the scope and substance of proposed regulations relating to disguised sales of partnership interests....
One of the major recommendations of the 2003 Report was that a "directly related" test, in addition to a "but for" test, should be applied in determining whether a transaction constitutes a disguised sale of a partnership interest. Although the Preamble accompanying the Proposed Regulations states, "The IRS and the Treasury Department agree that because many more transactions may potentially be subject to the proposed regulations [relating to disguised sales of partnership interests], it is appropriate that the proposed regulations be narrower than the existing regulations [relating to disguised sales of property between a partnership and a partner]," the Proposed Regulations did not adopt our recommendation that a disguised sale be found only when a "directly related" test was satisfied. Because we believe thata "but for" test may lead to inappropriate results in many ordinary cases and may treat as disguised sales nonabusive partnership contributions and distributions that ought not to be so recharacterized, we reiterate our view that a "directly related" test should be adopted.