Internal Revenue Code:Sec. 707. Transactions between partner and partnership

From TaxAlmanac

Location in Internal Revenue Code

     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter K - Partners and Partnerships
         PART I - DETERMINATION OF TAX LIABILITY
       

Statute

    Sec. 707. Transactions between partner and partnership
 
    (a) Partner not acting in capacity as partner
      (1) In general
        If a partner engages in a transaction with a partnership other
      than in his capacity as a member of such partnership, the
      transaction shall, except as otherwise provided in this section,
      be considered as occurring between the partnership and one who is
      not a partner.
      (2) Treatment of payments to partners for property or services
        Under regulations prescribed by the Secretary -
        (A) Treatment of certain services and transfers of property
          If -
            (i) a partner performs services for a partnership or
          transfers property to a partnership,
            (ii) there is a related direct or indirect allocation and
          distribution to such partner, and
            (iii) the performance of such services (or such transfer)
          and the allocation and distribution, when viewed together,
          are properly characterized as a transaction occurring between
          the partnership and a partner acting other than in his
          capacity as a member of the partnership,
        such allocation and distribution shall be treated as a
        transaction described in paragraph (1).
        (B) Treatment of certain property transfers
          If -
            (i) there is a direct or indirect transfer of money or
          other property by a partner to a partnership,
            (ii) there is a related direct or indirect transfer of
          money or other property by the partnership to such partner
          (or another partner), and
            (iii) the transfers described in clauses (i) and (ii), when
          viewed together, are properly characterized as a sale or
          exchange of property,
        such transfers shall be treated either as a transaction
        described in paragraph (1) or as a transaction between 2 or
        more partners acting other than in their capacity as members of
        the partnership.
    (b) Certain sales or exchanges of property with respect to
        controlled partnerships
      (1) Losses disallowed
        No deduction shall be allowed in respect of losses from sales
      or exchanges of property (other than an interest in the
      partnership), directly or indirectly, between -
          (A) a partnership and a person owning, directly or
        indirectly, more than 50 percent of the capital interest, or
        the profits interest, in such partnership, or
          (B) two partnerships in which the same persons own, directly
        or indirectly, more than 50 percent of the capital interests or
        profits interests.
      In the case of a subsequent sale or exchange by a transferee
      described in this paragraph, section 267(d) shall be applicable
      as if the loss were disallowed under section 267(a)(1). For
      purposes of section 267(a)(2), partnerships described in
      subparagraph (B) of this paragraph shall be treated as persons
      specified in section 267(b).
      (2) Gains treated as ordinary income
        In the case of a sale or exchange, directly or indirectly, of
      property, which in the hands of the transferee, is property other
      than a capital asset as defined in section 1221 -
          (A) between a partnership and a person owning, directly or
        indirectly, more than 50 percent of the capital interest, or
        profits interest, in such partnership, or
          (B) between two partnerships in which the same persons own,
        directly or indirectly, more than 50 percent of the capital
        interest or profits interests,
      any gain recognized shall be considered as ordinary income.
      (3) Ownership of a capital or profits interest
        For purposes of paragraphs (1) and (2) of this subsection, the
      ownership of a capital or profits interest in a partnership shall
      be determined in accordance with the rules for constructive
      ownership of stock provided in section 267(c) other than
      paragraph (3) of such section.
    (c) Guaranteed payments
      To the extent determined without regard to the income of the
    partnership, payments to a partner for services or the use of
    capital shall be considered as made to one who is not a member of
    the partnership, but only for the purposes of section 61(a)
    (relating to gross income) and, subject to section 263, for
    purposes of section 162(a) (relating to trade or business
    expenses).
 

Sources

    (Aug. 16, 1954, ch. 736, 68A Stat. 243; Pub. L. 94-455, title II,
    Sec. 213(b)(3), title XIX, Sec. 1901(b)(3)(C), Oct. 4, 1976, 90
    Stat. 1547, 1792; Pub. L. 98-369, div.  A, title I, Sec. 73(a),
    July 18, 1984, 98 Stat. 591; Pub. L. 99-514, title VI, Sec.
    642(a)(2), title XVIII, Sec. 1805(b), 1812(c)(3)(A), (B), Oct. 22,
    1986, 100 Stat. 2284, 2810, 2834.)
 

Miscellaneous

                                 AMENDMENTS
      1986 - Subsec. (a)(2)(B)(iii). Pub. L. 99-514, Sec. 1805(b),
    substituted ''sale or exchange of property'' for ''sale of
    property''.
      Subsec. (b)(1). Pub. L. 99-514, Sec. 1812(c)(3)(B), inserted at
    end ''For purposes of section 267(a)(2), partnerships described in
    subparagraph (B) of this paragraph shall be treated as persons
    specified in section 267(b).''
      Subsec. (b)(1)(A). Pub. L. 99-514, Sec. 1812(c)(3)(A),
    substituted ''a person'' for ''a partner''.
      Subsec. (b)(2)(A). Pub. L. 99-514, Sec. 1812(c)(3)(A),
    substituted ''a person'' for ''a partner''.
      Pub. L. 99-514, Sec. 642(a)(2), substituted ''50 percent'' for
    ''80 percent''.
      Subsec. (b)(2)(B). Pub. L. 99-514, Sec. 642(a)(2), substituted
    ''50 percent'' for ''80 percent''.
      1984 - Subsec. (a). Pub. L. 98-369 designated existing provisions
    as par. (1) and added par. (2).
      1976 - Subsec. (b)(2). Pub. L. 94-455, Sec. 1901(b)(3)(C),
    substituted ''as ordinary income'' for ''as gain from the sale or
    exchange of property other than a capital asset''.
      Subsec. (c). Pub. L. 94-455, Sec. 213(b)(3), substituted ''and,
    subject to section 263, for purposes of section 162(a)'' for ''and
    section 162(a)''.
                      EFFECTIVE DATE OF 1986 AMENDMENT
      Amendment by section 642(a)(2) of Pub. L. 99-514 applicable to
    sales after Oct. 22, 1986, in taxable years ending after such date,
    but not applicable to sales made after Aug. 14, 1986, which are
    made pursuant to a binding contract in effect on Aug. 14, 1986, and
    at all times thereafter, see section 642(c) of Pub. L. 99-514, set
    out as a note under section 1239 of this title.
      Amendment by sections 1805(b) and 1812(c)(3)(B) of Pub. L. 99-514
    effective, except as otherwise provided, as if included in the
    provisions of the Tax Reform Act of 1984, Pub. L. 98-369, div.  A,
    to which such amendment relates, see section 1881 of Pub. L.
    99-514, set out as a note under section 48 of this title.
      Section 1812(c)(3)(A) of Pub. L. 99-514 provided that the
    amendment made by that section is effective with respect to sales
    or exchanges after Sept. 27, 1985.
                      EFFECTIVE DATE OF 1984 AMENDMENT
      Section 73(b) of Pub. L. 98-369, as amended by Pub. L. 99-514,
    Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
      ''(1) In general. - The amendment made by subsection (a)
    (amending this section) shall apply -
        ''(A) in the case of arrangements described in section
      707(a)(2)(A) of the Internal Revenue Code of 1986 (formerly
      I.R.C. 1954) (as amended by subsection (a)), to services
      performed or property transferred after February 29, 1984, and
        ''(B) in the case of transfers described in section
      707(a)(2)(B) of such Code (as so amended), to property
      transferred after March 31, 1984.
      ''(2) Binding contract exception. - The amendment made by
    subsection (a) shall not apply to a transfer of property described
    in section 707(a)(2)(B)(i) if such transfer is pursuant to a
    binding contract in effect on March 31, 1984, and at all times
    thereafter before the transfer.
      ''(3) Exception for certain transfers. - The amendment made by
    subsection (a) shall not apply to a transfer of property described
    in section 707(a)(2)(B)(i) that is made before December 31, 1984,
    if -
        ''(A) such transfer was proposed in a written private offering
      memorandum circulated before February 28, 1984;
        ''(B) the out-of-pocket costs incurred with respect to such
      offering exceeded $250,000 as of February 28, 1984;
        ''(C) the encumbrances placed on such property in anticipation
      of such transfer all constitute obligations for which neither the
      partnership nor any partner is liable; and
        ''(D) the transferor of such property is the sole general
      partner of the partnership.''
                      EFFECTIVE DATE OF 1976 AMENDMENT
      Amendment by section 213(b)(3) of Pub. L. 94-455 applicable in
    the case of partnership taxable years beginning after Dec. 31,
    1975, see section 213(f)(1) of Pub. L. 94-455, set out as an
    Effective Date note under section 709 of this title.
      Amendment by section 1901(b)(3)(C) of Pub. L. 94-455 effective
    for taxable years beginning after Dec. 31, 1976, see section
    1901(d) of Pub. L. 94-455, set out as a note under section 2 of
    this title.
             PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title
    XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to
    any plan, such plan amendment shall not be required to be made
    before the first plan year beginning on or after Jan. 1, 1989, see
    section 1140 of Pub. L. 99-514, as amended, set out as a note under
    section 401 of this title.
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 42, 45D, 121, 144, 147,
    163, 170, 179, 179A, 197, 213, 221, 267, 304, 351, 355, 453, 465,
    469, 475, 514, 613A, 631, 643, 685, 706, 736, 860L, 871, 936, 988,
    1031, 1033, 1060, 1202, 1235, 1259, 1397, 1400B, 1400C, 1402, 2701,
    5881, 6038A, 6111, 7519, 7612 of this title; title 2 section 691e;
    title 42 section 411.