Partners that contribute property to a partnership are often interested in receiving tax-free distributions of money. However, this objective necessitates fitting within an exception to the partnership “disguised sale” rules. As we discussed in our last column, certain transactions involving partners receiving tax-free debt-financed distributions are no longer viable in light of recently issued treasury regulations. This development may increase the focus on other avenues for monetizing equity in the joint venture context, including the exception for certain tax-free reimbursements of capital expenditures. The new regulations have made important changes to this rule as well.
Background
A contribution of property to a partnership is generally tax-free, and a distribution of money by a partnership to a partner is generally tax-free to the extent of the partner’s basis in its partnership interest. However, if a partner contributes property to a partnership and the partnership distributes money to the partner within a two-year period, the regulations presume there to be a sale of property by the partner to the partnership (a “disguised sale”).
