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IRS issues disguised sale guidance.

Recently, the IRS issued its long-awaited regulations for "disguised sales"--transactions that in substance are sales but for tax purposes are structured as contributions to and distributions from a partnership. These rules have wide ramifications for corporations structuring joint ventures.

A contribution-distribution will be treated as a sale if the distribution step would not have occurred "but for" the contribution step. To alleviate the need to make such a subjective judgment, the regulations provide a disguised sale presumption for cases in which the steps are not separated by more than a two-year interval. If not so separated, the disguised sale presumption can be overcome only if the distribution step is subjected to the business risks of the partnership's business operations--that is, if the partner is not guaranteed the distribution will be made.

moreover, the assumption of a partner's indebtedness--incurred within two years of the property contribution--also will be treated as a tainted distribution, to the extent the liability exceeds the contributing partner's share thereof. Further, a borrowing by the partnership followed within 90 days by a distribution to the contributing partner also will be treated as the proceeds of a disguised sale in an amount exceeding the receiving partner's pro rata share of the obligation.

Observation: The regulations contain some useful, albeit limited, exceptions. Distribution treatment will not attach to

1. Guaranteed payments for capital.

2. Preferred distributions.

3. Operating cash flow distributions.

4. Reimbursements of preformation capital expenditures.

The regulations will undoubtedly shape the manner in which all joint ventures are created and operated.
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Publication:Journal of Accountancy
Date:Aug 1, 1991
Previous Article:Ordinary versus capital losses.
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