There are several disguised sale rules under Subchapter K. IRC Sections 707(a)(2)(B), 704(c)(1)(B), 737 and 751(b). Needless to say, Congress has created an extremely complicated set of rules, many of which are traps for the unwary. Two of these sections have a lot of subtleties built in and are probably violated often unintentionally. These are 704(c)(1)(B) and 737 which purportedly are supposed to act in tandem. The first deals with the situation where a partner who contributes built in gain property must recognize gain when that same property is distributed to another partner. The objective of this section is to prevent the contributing partner from shifting that built in gain to another partner. The second deals with the situation where a partner contributes built in gain property and then receives other property as a distribution. The purported purpose of this section is to prevent the contributing partner from avoiding the built in gain by receiving an in kind distribution in partial or complete liquidation of his interest. Both of these sections often apply in novel and unexpected situations. Below you will find a detailed explanation of the operation of 704 (c)(1)(B). In our next newsletter we will address 737.
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