Category: Partnerships & LLCs; Sales & Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com This memo is to memorialize our conversation of today. The taxpayer in this case plans to contribute an appreciated real property to a general partnership in exchange for a 75% general partnership interest. The property has a basis of about $450,000 and a FMV of between $1.5 to 1.8 million. Shortly after the contribution, a recourse loan in the amount of $2.6 million will be obtained and $1 million will be distributed to the taxpayer. It seems clear that this transaction will be subject to the disguised sale rules of Section 707(a)(2)(B). Ordinarily, taxpayers can transfer appreciated property tax free to a partnership under Section 721. However, Section 707(a)(2)(B) provides that an otherwise tax free transfer of property will be treated as a sale in whole or in part if the contribution is followed by a related distribution. Contributions and distributions are presumed related if they occur within two years of each other. This presumption can be rebutted by the taxpayer based on facts and circumstances. In this case, it seems unlikely that the taxpayer could successfully rebut the presumption that the two events are related because the transaction as described seems to be directly aligned with the type of transaction the statute claims to target. The important remaining question seems to be whether or not the entire distribution is treated as sale proceeds. The regulations and the legislative history of Section 707(a)(2)(b) provide that a single contribution/distribution may be split into a sale component and a contribution component. Since the taxpayer in this case presumably remains liable on a large part of the partnership debt which gave rise to the distribution, only the portion assumed by the other members of the partnership (or other parties such as lenders) should be subject to the disguised sale rules. The remainder should be treated under the normal contribution rules. If the debt giving rise to the distribution is properly shared under Section 752 and its related regulations on a 75%-25% basis, then it seems that only 25% of the transaction should be treated as sale and the remaining 75% treated as contribution. Please note carefully that all the facts and circumstances are taken into account in determining how the transaction is split, if at all, between sale and contribution. All the provisions of the partnership agreement, the debt instrument, guaranties, collateral agreements, and any side agreements between the partners should be reviewed carefully to insure that economic arrangements indicated in those agreements do not force a different conclusion. |
