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Note that if the distribution was one that liquidated their interest, if the disguised sales rules did not apply the partner would get the same basis as if he/she purchased the lot directly but the partners in the partnership who received an allocation of gain (most likely the general partners) would not have any taxable income to report. The partnership did not seriously attempt to argue that the limited partners would have made the transfer of money even if there had been no agreed upon later distribution—rather the partnership based its position on the argument that the limited partners had entrepreneurial risk since the distribution was conditioned on the easement. The Tax Court found that the facts did not support this view. The Court noted: The provisions in the agreements, purporting to condition the distributions of Homesite parcels on the donations of the easements to the NALT, were inconsequential. The 2005 easement was granted on December 29, 2005, two days prior to the date on which the BCR I LP agreement was executed, and the 2007 easement was granted in September 2007, three months prior to the date the BCR II LP agreement was executed. In addition, Mr. Friedman and Randolph Addison, Jr., both testified that the partnerships would have refunded the amounts paid by the limited partners if the easements were not granted. In sum, the distributions to the limited partners were made in exchange for the limited partners’ payments and were not subject to the entrepreneurial risks of the partnerships’ operations. Accordingly, each exchange constituted a disguised sale of partnership property by BCR I or BCR II in exchange for each limited partner’s payments. See sec. 707(a)(2)(B); sec. 1.707-3(b)(1), Income Tax Regs. The property sold to each limited partner consisted of a Homesite parcel and an appurtenant right to use BC Ranch’s common areas (i.e., a one-forty-seventh interest therein). The 24 disguised sales effectuated by BCR I and the 23 disguised sales effectuated by BCR II constituted sales by the partnerships of all of their interests in BC Ranch. The disguised sales rules are meant to block what the IRS believed were abusive transactions by treating the transaction not under the contribution and distribution rules, but rather treating them as a transaction with the partnership not made as a partner under the provisions of IRC §707(a)(1). Attempting to “paper over” the entrepreneurial risk requirement won’t escape this treatment—especially when (as in this case) it is unlikely the supposedly “risky” event will actually occur and, even
Note that if the distribution was one that liquidated their interest, if the disguised sales rules did not apply the
ReplyDeletepartner would get the same basis as if he/she purchased the lot directly but the partners in the partnership who
received an allocation of gain (most likely the general partners) would not have any taxable income to report.
The partnership did not seriously attempt to argue that the limited partners would have made the transfer of
money even if there had been no agreed upon later distribution—rather the partnership based its position on the
argument that the limited partners had entrepreneurial risk since the distribution was conditioned on the
easement.
The Tax Court found that the facts did not support this view. The Court noted:
The provisions in the agreements, purporting to condition the distributions of Homesite parcels on the
donations of the easements to the NALT, were inconsequential. The 2005 easement was granted on
December 29, 2005, two days prior to the date on which the BCR I LP agreement was executed, and
the 2007 easement was granted in September 2007, three months prior to the date the BCR II LP
agreement was executed. In addition, Mr. Friedman and Randolph Addison, Jr., both testified that the
partnerships would have refunded the amounts paid by the limited partners if the easements were not
granted. In sum, the distributions to the limited partners were made in exchange for the limited partners’
payments and were not subject to the entrepreneurial risks of the partnerships’ operations. Accordingly,
each exchange constituted a disguised sale of partnership property by BCR I or BCR II in exchange for
each limited partner’s payments. See sec. 707(a)(2)(B); sec. 1.707-3(b)(1), Income Tax Regs. The
property sold to each limited partner consisted of a Homesite parcel and an appurtenant right to use BC
Ranch’s common areas (i.e., a one-forty-seventh interest therein). The 24 disguised sales effectuated
by BCR I and the 23 disguised sales effectuated by BCR II constituted sales by the partnerships of all
of their interests in BC Ranch.
The disguised sales rules are meant to block what the IRS believed were abusive transactions by treating the
transaction not under the contribution and distribution rules, but rather treating them as a transaction with the
partnership not made as a partner under the provisions of IRC §707(a)(1). Attempting to “paper over” the
entrepreneurial risk requirement won’t escape this treatment—especially when (as in this case) it is unlikely the
supposedly “risky” event will actually occur and, even