Guidance on Partnership Disguised Sales and Liabilities

Gain a better understanding on what a disguised sale is and the role of liabilities in partner to partnership disguised sale determinations.

Many taxpayers make investments or operate businesses through entities that are treated as partnerships for U.S. federal income tax purposes, including limited liability companies, limited partnerships, and many foreign entities. A key factor that drives the popularity of partnerships is that many transactions involving partnerships, such as contributions of property to a partnership and distributions of cash from a partnership, can generally be accomplished tax-free. However, the partnership disguised sale rules under Section 707 of the Internal Revenue Code set many traps for the unwary that may result in otherwise tax-free transactions being treated as taxable sales. The disguised sale rules’ ambit can capture even innocuous ordinary course transactions and result in unexpected tax liability. This material will provide an overview of these disguised sale rules, with an emphasis on disguised sales of property from a partner to a partnership, the key exceptions to partner to partnership disguised sale treatment, and how assumptions by the partnership of a partner’s liabilities factor in to these disguised sale rules. This topic is critical for practitioners and taxpayers that want to maximize the U.S. federal income tax benefits of partnerships while avoiding unexpected pitfalls.

Learning Objectives

You will be able to define a disguised sale for purposes of Subchapter K of the Internal Revenue Code.
You will be able to identify potential disguised sale issues in a transaction.
You will be able to discuss the key exceptions to disguised sale treatment.
You will be able to explain how different types of liabilities assumed by a partnership impact disguised sale treatment.

Agenda

	What Is a Disguised Sale?
	Disguised Sale of Property From Partner to Partnership Disguised Sale of Property From Partnership to Partner Disguised Sales of Partnership Interests Disguised Payments for Services

	Exceptions to Partner to Partnership Disguised Sale Treatment
	Guaranteed Payments for Capital Preferred Returns Operating Cash Flow Distributions Reimbursement for Preformation Expenditures

	Role of Liabilities in Partner to Partnership Disguised Sale Determinations
	Qualified Liabilities vs. Non-Qualified Liabilities Determining Liabilities Recent Developments Regarding Guarantees

Leo Greenberg

Skadden, Arps, Slate, Meagher & Flom LLP

Associate in the Boston office of Skadden, Arps, Slate, Meagher & Flom LLP
Advises public and private companies on a broad range of U.S. federal income tax matters, with particular focus on U.S. and cross-border transactions
Practice includes significant work advising multinational companies in connection with domestic and cross-border mergers and acquisitions, and post-acquisition restructuring and integration transactions
Co-author of the United States chapter of The Inward Investment and International Taxation Review
LL.M. degree in taxation and J.D. degree, summa cum laude, Boston University School of Law
Can be contacted at leonard.greenberg@skadden.com

Paul Schockett

Skadden, Arps, Slate, Meagher & Flom LLP

Partner in the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP
Advises public and private companies on a broad range of U .S. federal income tax matters, with particular focus on U.S. and cross-border transactions
Practice includes significant work involving the tax aspects of partnership transactions and renewable energy project finance
Frequently writes and lectures on tax-related topics, including partnership taxation, M&A transaction structuring, tax aspects of troubled company workouts, and renewable energy tax benefits
Can be contacted at paul.schockett@skadden.com