The IRS issued final regulations that address the allocation of partnership liabilities for disguised sale purposes. The regulations replace existing temporary regulations with final regulations that were in effect prior to the temporary regulations. As a result, the temporary regulations are withdrawn.

Related transfers of money or other property to and by a partnership that, when viewed together, are more properly characterized as a sale or exchange of property, will be treated either as a transaction between the partnership and one who is not a partner or between two or more partners acting other than in their capacity as partners (generally referred to as “disguised sales”).

The temporary regulations had adopted an approach requiring a partnership to apply the same percentage used to determine a partner’s share of excess nonrecourse liabilities in determining the partner’s share of all partnership liabilities for disguised sale purposes. The IRS has decided to continue studying the merits of this approach and other proposed approaches to determine which results in the most appropriate treatment of liabilities in the context of disguised sales.

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Please call our office if you would like additional guidance on how the final regulations applies to your partnership with respect to the allocation of recourse and nonrecourse liabilities among the partners.