IRS requests comments on disguised-sale prop. regs.

• Author: Kautter, David J.

In Notice 2001-64, the IRS requested comments on regulations to be proposed under Sec. 707(a)(2)(B) on disguised sales of partnership interests. Specifically, the Service seeks input on the scope and substance of such guidance, including safe harbors and exceptions.

The legislative history of Sec. 707(a)(2)(B) states that Congress intended the provision to address taxpayers characterizing what were, in substance, sales of partnership property (such as partnership interests) as contributions, followed by (or preceded by) a related partnership distribution, to defer (or avoid) tax on that sale. Specifically, Congress was concerned about court decisions that allowed tax-free treatment in cases economically indistinguishable from sales of property to a partnership or to another partner, believing that these transactions should be treated for tax purposes in a manner consistent with their underlying economic substance.

In 1991, the IRS and Treasury issued final regulations under Sec. 707(a)(2)(B), adding Regs. Secs. 1.707-0 and 1.707-2-1.707-9. However, the government reserved Regs. Sec. 1.707-7 for rules on disguised sales of partnership interests. Ten years later, there is still no guidance.

Based on the statutory language, many commentators questioned the Service's ability to enforce Sec. 707(a)(2)(B) (on the disguised sale of partnership interests) without regulations. These comments notwithstanding, the IRS believes that it can. In...