On October 5, 2016, the IRS and Treasury released a package of new regulations under Code sections 707 and 752 designed to curtail the use of debt to reduce tax on the contribution of appreciated assets to leveraged partnerships. In recent years, such structures have been commonly used in drop-down capitalizations of joint ventures and publicly-traded partnerships (usually referred to as “MLPs”), frequently in high dollar value transactions that allowed cash from the partnership to be distributed to the corporate sponsors with minimal gain recognition. Under the new rules, partnership debt which would previously have been allocated to the corporate sponsor to increase its basis and decrease its gain recognition is much less likely to be so allocable.
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