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IRS Proposed Regulations Limit Tax-Free Contributions and Distributions of Leveraged Property to and from Partnerships, Reduce Partnership Deduction Allocation Flexibility

February 3, 2014 Business & Tax Blog Capital Gain Transactions

On January 30, IRS proposed income tax regulations reducing flexibility to allocate partnership deductions. The regulations also limit tax-free contributions and distributions of leveraged property, including mortgaged real estate, to and from partnership entities. The taxation of partnerships and many LLCs could change.

Old transactions are not permanently grandfathered. Pre-existing arrangements eventually may require restructuring to avoid recognition of gain that was previously deferred.

While these proposals are less taxpayer-friendly than existing law, taxpayers should not necessarily jump to restructure preexisting arrangements. The proposed regulations contemplate a transition period after finalization, and they must survive a public comment process before becoming effective. We anticipate these regulations will receive significant scrutiny. The regulations may change substantially before finalization, or they may never be finalized.

We do recommend re-evaluation of new transactions that may not permanently achieve favorable results if the proposed regulations become law.

Here is a link to the proposed regulations: http://www.gpo.gov/fdsys/pkg/FR-2014-01-30/pdf/2014-01637.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037