In a series of private letter rulings (PLRs 201613001, 201613002 and 201613003) the IRS issued a ruling on how to handle a situation where both the related party loss rules of IRC §707(b)(1)(a) and the substantial built-in loss rules of §743(d) applied to a transaction.

The cases involved the sale of a partnership interest to a grantor trust by a partnership in a transaction that triggered a disallowed loss to the seller under the related party rules of IRC §707(b)(1)(a). 

The IRS has issued proposed regulations (REG-115452-14) that will establish a series of tests to determine if an arrangement will be treated as a disguised payment for services under IRC §707(a)(2)(A).  The key test, based on the section’s legislative history, will be whether the payment is subject to significant entrepreneurial risk.

The third time was not a charm for the taxpayer in the case of SWF Real Estate, LLC, et al. v. Commissioner, TC Memo 2015-63.  As was true in the case of Virginia Historic Tax Credit Fund 2001 v. Commissioner, 693 F.3d 146, CA4 reversing TC Memo 2009-295 and Route 231, LLC v. Commissioner, TC Memo 2014-30 the issue involved whether individuals who paid money to become “partners” that received tax credits from the state of Virginia had really simply bought credits in a disguised sale under IRC §707(a)(2).  And, as was eventually found in the prior cases, the Court determined the answer was yes.