New Proposed Related-Party Regulations
We wanted to bring to your attention new proposed related-party regulations that were issued late last month. As background, §707(b)(1) precludes the deductibility of losses on the sale of property between a partner and a partnership where the partner owns, directly or indirectly, more than 50% of the capital or profits interests in the partnership. Indirect ownership is determined using the §267 attribution rules. Code §267, itself, contains a related-party loss deductibility prohibition for other types of related-party sale transactions (in §267(a)(1)), and §267(a)(2) provides a deductibility “matching rule” for expenses and interest incurred in transactions between related-parties. In addition, §267(e) provides a “piercing” rule whereby the §267(a)(2) expense deductibility prohibition rule is applied to a partner’s share of “mismatched” expenses, even if the more than 50% related-party ownership threshold is not present (i.e., more than 50% ownership results in 100% non-deductibility, and 50% or less ownership results only in non-deductibility for the partner entering into the transaction).
Prior to certain statutory changes made more than 25 years ago, the §267(e) piercing rule also applied to losses incurred from a sale of property between a 50% or less partner and the partnership, and regulations were issued addressing this issue. However, notwithstanding the statutory repeal of this provision, these regulations still remain in effect today. Among other items, the newly proposed related-party regulations would eliminate these older regulations, which older regulations are contrary to §267 as currently in effect. While the proposed regulatory change, obviously, is not controversial, the proposed regulations do not go far enough in that they do not provide for retroactive effect.