Partnership Tax Law: Disguised Sales Transactions

Summary

This practice note discusses the taxation of disguised sales in partnerships and other flow-through entities. A disguised sale occurs when a partner supposedly "contributes" property with a built-in gain to a partnership and then immediately, or a short time after, receives a related "distribution." A contribution and distribution would normally be tax-free for the partner and the partnership, but the transaction can be taxable to avoid potential abuse.