An alternative to the safe-harbor rules under the 704(b) regulations

Article Abstract:

Taxable income and loss in a partnership should be allocated in the same way the partners have agreed upon to share economic profits and losses. This approach is simpler than the safe-harbor test of the Treasury Regulations under Section 704(b) for fulfilling the statutory requirement of 'substantial economic effect.' Examples illustrate application of the proposed method to loss allocations, offsetting prior allocations, effect of depreciation, nonrecourse deductions and distribution of partnership property.

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A proposal for achieving substantial economic effect

Article Abstract:

A rule for allocating partnership gain and loss based on the recognition that would occur at the end of the tax year if the partnership were liquidated should be used under IRC section 704(b) to demonstrate substantial economic effect. The safe harbor available under the section 704 regulations is unnecessarily complex and burdensome. This proposed rule can be modified to account for instances when section 704(c) applies and when basis adjustments under sections 734 and 743 occur.

United States

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Mixing-bowl transactions and the partnership disguised sale regulations

Article Abstract:

'Mixing-bowl' transactions are designed so that selling partners can receive property through the exchange of built-in gain property. The partners can then defer recognition of the taxable gain. Proposed regulations state that, if the distribution that follows a transfer of property to a partnership is not subject to the partnership's 'entrepreneurial risks,' then the transaction is considered a disguised sale.

Recognition of gain or loss (Taxation), Recognized gain or loss (Taxation), Transfer (Law)

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