In October 2016, the Treasury Department issued regulations that significantly restricted the ways in which a partner can contribute property to a partnership and receive a tax-free distribution of money. In June 2018, proposed regulations were issued that would once again permit some of those transactions.
Background
In general, a contribution of property to a partnership is tax-free, and a distribution of money from a partnership to a partner is only taxable to the extent it exceeds 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 two years of the contribution, the transaction is generally treated as a disguised sale of property by the partner to the partnership, which is taxable to the partner.
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