On November 10, 2017, P&D Special Counsel Dan M. Smolnik gave a presentation before the Federal Tax Institute regarding the new changes to the Disguised Sales Rules. The presentation also identified key points for entities to consider in light of these changes.
With new changes in the Disguised Sale Rules, partnerships, including LLCs treated as partnerships, will need to consider the following:
- Revisions to operating agreements to reflect suitable debt allocation mechanisms in light of the restriction to use only of “partners’ share of the profits” method of debt allocation. Economic risk of loss and the other methods articulated in Reg Section 1.752-3(a)(3) are now explicitly excluded;
- Immediate review of agreement terms to assure that Deficit Restoration Obligation terms do not threaten to violate the ban on Bottom Dollar Guarantees. As DROs are required to access the PIP safe harbor (and, thereby, provide the partnership agreement the required substantial economic effect to be respected by IRS) it will take some care to prepare these terms now;
- Trial calculations of tax effects of anticipated contributions of appreciated capital property;
- Advisability of placing debt at the entity level instead of the asset level.