CCAs address partnership transactions.

• Author: Madden, David
• Position: Chief Counsel Advice from the IRS

In late 2002, the IRS National Office issued a pair of Chief Counsel Advice (CCA) scrutinizing the form of two structured partnership transactions. Each memorandum analyzed a transaction involving a property transfer between a partnership and one of its partners. In each, the IRS took the position that, under Sec. 707(a)(2)(B), the property transfer should be treated as a transaction between a partnership and a party who is not a partner (a "disguised" sale of property). In so doing, the Service appears ready to challenge these types of transactions using an array of statutory provisions and judicial theories. It issued these heavily redacted memoranda less than one month apart, indicating that it may be sharpening its focus in examining these types of transactions.

CCA 200246014

In the first memorandum, issued Nov. 15, 2002, the IRS argued (based on several different theories) that the form of a partnership-formation transaction should be recast as a property sale.

A taxpayer sold certain high-basis/high-value assets to X and contributed certain low-basis/high-value assets to a wholly owned subsidiary, Y. Y then contributed those assets to a partnership, Z, in exchange for a common equity interest and a preferred interest. X contributed assets (including a portion of the assets previously purchased from the taxpayer) and cash to Z for a common equity interest. Z then borrowed funds and immediately distributed a portion of them to Y. Y guaranteed the loan to Z and immediately distributed the funds as a dividend to the taxpayer.

The taxpayer argued that Y's guarantee of the loan to Z made the liability recourse to Y under Regs. Sec. 1.752-2, so that Y should be allocated the entire loan amount. This allocation would enable Y to increase its basis for its Z interest by the loan amount.

IRS's Analysis

Without this additional basis, the distribution to Y could exceed Y's basis for its Z interest, resulting in gain to Y under Sec. 731. In addition, if Y were allocated less than the entire loan amount, the distribution of loan proceeds to Y could be treated as consideration in a disguised asset sale by Y to Z under Regs. Sec. 1.707-5(b)(1), to the extent the distribution exceeded Y's allocable share of the liability.

Concluding that Y was severely undercapitalized and had no real performance obligation on the guarantee, the Service determined that Y's guarantee should be disregarded. The IRS then determined that Z's loan was a nonrecourse...