On October 5, 2016, the Internal Revenue Service (“IRS”) and Treasury Department published final regulations (the "Final Regulations"), temporary regulations (the "Temporary Regulations") and new proposed regulations (the “Proposed Regulations”) addressing (1) the allocation of partnership liabilities under Section 752, (2) the allocation of partnership liabilities in connection with partnership disguised sales under Section 707 and (3) certain other partnership-related items. The IRS and the Treasury Department previously issued proposed regulations (the "2014 Proposed Regulations") on January 29, 2014. As discussed below, this new package of regulations largely adopts the concepts regarding allocations of partnership liabilities under Section 752 contained in the 2014 Proposed Regulations, with certain significant changes in response to comments. As a significant departure from prior law, the new regulations for disguised sales also flatly prevent a contributing partner from increasing its share of partnership liabilities through a guarantee of (or other arrangement with respect to) partnership indebtedness for purposes of determining whether and to what extent a disguised sale has occurred. Among other things, the new regulations thus substantially limit the ability to receive cash tax-free in leveraged partnership transactions by preventing a contributing partner from increasing its share of partnership liabilities (and tax-free distributions) through guarantees or other arrangements. The new regulations also modified the antiabuse rule proposed in the 2014 Proposed Regulations, initially based on a list of factors, to one based on facts and circumstances. We anticipate the new package of regulations will have a significant impact on real estate and other partnership transactions.

DISGUISED SALE RULES -

Allocation of Liabilities and Leveraged Partnership Transactions -

Section 707 provides rules treating the contribution of property to a partnership followed by a distribution of cash by the partnership to the contributor as a "disguised sale" for U.S. tax purposes. Under certain circumstances, Section 707 also treats the assumption of a liability of, or the receipt of encumbered property from, a contributing partner as a disguised sale. One significant exception to the disguised sale rules is the so-called "debt financed distribution" rule, which provides an exception for distributions financed by a partnership borrowing to the extent the partner to whom the distribution is made is allocated a share of the borrowing. As a result, a distribution of money to a partner by a partnership is not considered a disguised sale to the extent the distribution is traceable to a partnership borrowing and the amount of the distribution does not exceed the partner's allocable share of the liability incurred to fund the distribution.