Disguised Sale Rule Reversal: Using Leveraged Partnerships to Defer Gain on Debt-Financed Distributions

In June 2018 the IRS issued proposed regulations, REG-131186-17, which reverse previous guidance under the Section 707 disguised sales rules. The proposed regulations restore significant deferral opportunities using "leveraged partnerships." By eliminating the disguised sale provisions, the new regulations permit a selling partner to transfer interests in appreciated business or investment assets for cash without the transfer qualifying as a recognition event.

The typical leveraged partnership structure involves a seller of an appreciated asset transferring the asset to a partnership in exchange for a partnership interest. The selling partner then takes a leveraged cash distribution, while providing a guarantee of the partnership debt equivalent to the amount of the cash distribution.

The IRS in 2016 issued proposed regulations which required partnerships to treat all debt in the case of a contribution of appreciated property as nonrecourse, allocated to all partners on a pro-rata basis regardless of whether the contributing partner bore the economic risk of loss. Under these disguised sale rules, a contribution of the appreciated property followed by a debt-financed distribution would require the partnership to recognize the built-in appreciation on the contributed property as taxable gain.

The 2018 regulations reverse the disguised sale rules, allowing partners using leveraged partnership transactions to defer gain on the debt-financed distributions by guaranteeing the partnership debt financing the distribution. This change enables partners to extract equity from the transfer of appreciated assets without a current tax liability in the year of the transaction.

Listen as our experienced panelist provides a critical first look at the new partnership debt regulations and offers practical guidance on protecting client partnerships from costly tax consequences. This panelist will help practitioners navigate the challenges posed by the new regulations.

1. 2016 temporary and proposed regulations and impact on leveraged partnerships
   1. Section 707 disguised sale rules
   2. Distinguishing recourse from nonrecourse debt
2. New proposed regulations reversing the 2016 rules
3. Applying the "economic risk of loss" analysis to the allocation of partnership debt for purposes of Section 707
4. Retention of 2016 rules restricting "bottom dollar payment obligations"
5. Restoring planning opportunities with leveraged partnerships

The panelist will discuss these and other relevant topics:

• Distinguishing recourse from nonrecourse partnership debt
• The impact of the new regulations on everyday business transactions, such as leveraged partnerships and asset drop-down transactions
• Allocating debt based on the economic risk of loss to contributing partner
• What parts of the 2016 rules do the new proposed regulations reverse, and which parts do they keep?

Learning Objectives

After completing this course, you will be able to:

• Determine the specific changes the 2018 proposed regulations make to the allocation of partnership debt to a partner contributing leveraged property under the Section 707 disguised sale rules
• Identify planning opportunities arising from the new regulations in using leveraged partnerships or other debt structures to defer gain on partnership contributions
• Discern how to apply the economic risk of loss analysis in allocating partnership debt
• Recognize tax reporting requirements under the new regulations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business, law or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of tax reporting and planning for partnership and other pass-through entities; familiarity with prior disguised sale rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).