The Internal Revenue Service (IRS) proposed regulations on June 19 that would modify the tax treatment of liabilities for purposes of disguised sales. The regulations would withdraw regulations proposed in 2016 and reinstate regulations that were in force prior to that time.
As provided by the tax code, a “disguised sale” occurs when a property is transferred in a non-arm’s length manner. For example, such a sale could occur when an owner of a property transfers the property to a partnership in which they have an interest in exchange for cash.
The proposed regulation calls for separate rules to determine a partner’s share of recourse and nonrecourse liabilities for disguised sales purposes. Although the proposed regulations call for the aforementioned changes, the current regulations on bottom-dollar guarantees will stay intact.
The regulation is being proposed because Treasury and the IRS had identified that the existing temporary regulations are burdensome. These findings were published in a report last October, pursuant to an Executive Order issued by President Trump.
The proposed regulation would be effective 30 days after they are made final. However, a partnership and its partners may apply all of the proposed regulation rules to any transaction where all transfers occur on or after January 3, 2017.
NMHC/NAA would be interested in any input members may have to the IRS’ action in the disguised sales area.
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