[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.707-6]

[Page 486-488]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.707-6  Disguised sales of property by partnership to partner; 
general rules.

    (a) In general. Rules similar to those provided in Sec. 1.707-3 
apply in determining whether a transfer of property by a partnership to 
a partner and one or more transfers of money or other consideration by 
that partner to the partnership are treated as a sale of property, in 
whole or in part, to the partner.
    (b) Special rules relating to liabilities--(1) In general. Rules 
similar to those provided in Sec. 1.707-5 apply to determine the extent 
to which an assumption of or taking subject to a liability by a partner, 
in connection with a transfer of property by a partnership, is 
considered part of a sale. Accordingly, if a partner assumes or takes 
property subject to a qualified liability (as defined in paragraph 
(b)(2) of this section) of a partnership, the partner is treated as 
transferring consideration to the partnership only to the extent 
provided in paragraph (b). If the partner assumes or takes subject to a 
liability that is not a qualified liability, the amount treated as 
consideration transferred to the partnership is the amount that the 
liability assumed or taken subject to by the partner exceeds the 
partner's share of that liability (determined under the rules of Sec. 
1.707-5(a)(2)) immediately before the transfer. Similar to the rules 
provided in Sec. 1.707-5(a)(4), if more than one partner assumes or 
takes subject to a liability pursuant to a plan, the amount that is 
treated as a transfer of consideration by each partner is the amount by 
which all of the liabilities (other than qualified liabilities) assumed 
or taken subject to by the partner pursuant to the plan exceed the 
partner's share of all of those liabilities immediately before the 
assumption or taking subject to. This paragraph (b)(1) does not apply to 
any liability assumed or taken subject to by a partner with a principal 
purpose of reducing the extent to which any other liability assumed or 
taken subject to by a partner is treated as a transfer of consideration 
under this paragraph (b).
    (2) Qualified liabilities. (i) If a transfer of property by a 
partnership to a partner is not otherwise treated as part of a sale, the 
partner's assumption of or taking subject to a qualified liability is 
not treated as part of a sale. If a transfer of property by a 
partnership to the partner is treated as part of a sale without regard 
to the partner's assumption of or taking subject to a

[[Page 487]]

qualified liability, the partner's assumption of or taking subject to 
that liability is treated as a transfer of consideration made pursuant 
to a sale of such property to the partner only to the extent of the 
lesser of--
    (A) The amount of consideration that the partner would be treated as 
transferring to the partnership under paragraph (b) of this section if 
the liability were not a qualified liability; or
    (B) The amount obtained by multiplying the amount of the liability 
at the time of its assumption or taking subject to by the partnership's 
net equity percentage with respect to that property.
    (ii) A partnership's net equity percentage with respect to an item 
of property encumbered by a qualified liability equals the percentage 
determined by dividing--
    (A) The aggregate transfers to the partnership from the partner 
(other than any transfer described in this paragraph (b)(2)) that are 
treated as the proceeds realized from the sale of the transferred 
property to the partner; by
    (B) The excess of the fair market value of the property at the time 
it is transferred to the partner over any qualified liabilities of the 
partnership that are assumed or taken subject to by the partner at that 
time.
    (iii) For purposes of this section, the definition of a qualified 
liability is that provided in Sec. 1.707-5(a)(6) with the following 
exceptions--
    (A) In applying the definition, the qualified liability is one that 
is originally an obligation of the partnership and is assumed or taken 
subject to by the partner in connection with a transfer of property to 
the partner; and
    (B) If the liability was incurred by the partnership more than two 
years prior to the earlier of the date the partnership agrees in writing 
to transfer the property or the date the partnership transfers the 
property to the partner, that liability is a qualified liability whether 
or not it has encumbered the transferred property throughout the two-
year period.
    (c) Disclosure rules. Similar to the rules provided in Sec. Sec. 
1.707-3(c)(2) and 1.707-5(a)(7)(ii), a partnership is to disclose to the 
Internal Revenue Service, in accordance with Sec. 1.707-8, the facts in 
the following circumstances:
    (1) When a partnership transfers property to a partner and the 
partner transfers money or other consideration to the partnership within 
a two-year period (without regard to the order of the transfers) and the 
partnership treats the transfers as other than a sale for tax purposes; 
and
    (2) When a partner assumes or takes subject to a liability of a 
partnership in connection with a transfer of property by the partnership 
to the partner, and the partnership incurred the liability within the 
two-year period prior to the earlier of the date the partnership agrees 
in writing to the transfer of property or the date the partnership 
transfers the property, and the partnership treats the liability as a 
qualified liability under rules similar to Sec. 1.707-5(a)(6)(i)(B).
    (d) Examples. The following examples illustrate the rules of this 
section.

    Example 1. Sale of property by partnership to partner. (i) A is a 
member of a partnership. The partnership transfers property X to A. At 
the time of the transfer, property X has a fair market value of 
$1,000,000. One year after the transfer, A transfers $1,100,000 to the 
partnership. Assume that under the rules of section 1274 the imputed 
principal amount of an obligation to transfer $1,100,000 one year after 
the transfer of property X is $1,000,000 on the date of the transfer.
    (ii) Since the transfer of $1,100,000 to the partnership by A is 
made within two years of the transfer of property X to A, under rules 
similar to those provided in Sec. 1.707-3(c), the transfers are 
presumed to be a sale unless the facts and circumstances clearly 
establish otherwise. If no facts exist that would rebut this 
presumption, on the date that the partnership transfers property X to A, 
the partnership is treated as having sold property X to A in exchange 
for A's obligation to transfer $1,100,000 to the partnership one year 
later.
    Example 2. Assumption of liability by partner. (i) B is a member of 
an existing partnership. The partnership transfers property Y to B. On 
the date of the transfer, property Y has a fair market value of 
$1,000,000 and is encumbered by a nonrecourse liability of $600,000. B 
takes the property subject to the liability. The partnership incurred 
the nonrecourse liability six months prior to the transfer of property Y 
to B and used the proceeds to purchase an unrelated asset. Assume that,

[[Page 488]]

under rule of Sec. 1.707-5(a)(2)(ii) (which determines a partner's 
share of a nonrecourse liability), B's share of the nonrecourse 
liability immediately before the transfer of property Y was $100,000.
    (ii) The liability is not allocable under the rules of Sec. 1.163-
8T to capital expenditures with respect to the property transferred to B 
and was not incurred in the ordinary course of the trade or business in 
which the property transferred to the partner was used or held. Since 
the partnership incurred the nonrecourse liability within two years of 
the transfer to B, under rules similar to those provided in Sec. 1.707-
5(a)(5), the liability is presumed to be incurred in anticipation of the 
transfer unless the facts and circumstances clearly establish the 
contrary. Assuming no facts exist to rebut this presumption, the 
liability taken subject to by B is not a qualified liability. The 
partnership is treated as having received, on the date of the transfer 
of property Y to B, $500,000 ($600,000 liability assumed by B less B's 
share of the $100,000 liability immediately prior to the transfer) as 
consideration for the sale of one-half ($500,000/$1,000,000) of property 
Y to B. The partnership is also treated as having distributed to B, in 
B's capacity as a partner, the other one-half of property Y.

[T.D. 8439, 57 FR 44987, Sept. 30, 1992]