Proposed rules define disguised payments for services in partnerships
The IRS is proposing to apply a nonexclusive six-factor test to determine whether payments from a partnership to a partner are disguised payments for services that are not rendered in the partner’s capacity as a partner in the partnership in proposed regulations issued on Wednesday (REG-115452-14).
Under the partnership rules, an allocation or distribution between a partnership and a partner for the provision of services can be treated in one of three ways: (1) as a Sec. 704(b) distributive share; (2) as a Sec. 707(c) guaranteed payment; or (3) as a transaction under Sec. 707(a) in which a partner has rendered services to the partnership in a capacity other than as a partner.
A disguised payment occurs when a partner performs services for a partnership, but the payment for the services is treated as an allocation or distribution of partnership income, even though the performance of services and allocation or distribution, when viewed together, would properly be characterized as a transaction occurring between the partnership and a partner acting other than in its capacity as a partner. In those cases, the transaction will be treated as occurring between the partnership and one who is not a partner.
Under the rules, an arrangement will be treated as a disguised payment for services if (1) a service provider, either as a partner or in anticipation of being a partner, performs services (directly or through its delegate) to or for the benefit of the partnership; (2) there is a related direct or indirect allocation and distribution to the service provider; and (3) the performance of the services and the allocation and distribution are properly characterized as a transaction occurring between the partnership and a person acting other than in that person’s capacity as a partner. Read more on the Journal of Accountancy.