DISGUISED SALES of partnership interests get attention from the US tax authorities.
A partner in a partnership might sometimes try to sell part of his interest to someone else but structure the deal so that it is not taxed as a sale. For example, a third party joining the partnership might make a cash
contribution to the partnership. The cash is then distributed to one of the existing partners. Cash distributions are normally not taxed. Gain from a sale would be.
The Internal Revenue Service proposed new regulations in late November that identify arrangements that the government will treat as disguised sales of partnership interests. In general, whenever one partner
makes a capital contribution to the partnership and all or part of the capital is then distributed to another partner within two years, the partner receiving the distribution will be treated as having sold part of his interest. This is a presumption. The partner may be able to rebut it. The IRS listed 10 factors that tend to point to a disguised sale.
There is no disguised sale when a partnership uses cash just contributed by a new partner to redeem the entire interest of an existing partner. The main tax consequences of a liquidating distribution by a partnership to an exiting partner are the same as if he had sold his interest.