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Florida Tax Review

Abstract

Our analysis will demonstrate that a consistent application of the entity theory of partnerships best implements the policy objectives of Subchapter K with respect to the treatment of in-kind guaranteed payments. As a result, our ultimate conclusions differ from Kahn and Cuenin’s (Guaranteed Payments Made in Kind by a Partnership, 6 Fla. Tax Rev. 405 (2004)) only with respect to the question of gain or loss recognition by the transferring partnership. However, in reaching this conclusion, we undertake a more searching analysis of the statutory language, legislative history, and judicial interpretation of section 707 as well as a more careful application of the governing law to a number of hypothetical situations that Kahn and Cuenin posed in their article.

This commentary proceeds as follows. Part II provides a summary of the history and evolution of section 707 that we detailed in our previous article. In particular, we reiterate the fact that the enactment of section 14707(a)(2) in 1984 fundamentally changed the interpretation of section 707 and effectively repealed section 707(c). Part III then considers the question of in-kind guaranteed payments, focusing first on Kahn and Cuenin’s central thesis and then considering the three questions that in-kind guaranteed payments explicitly raise: (1) the recognition of gain or loss by the transferring partnership, (2) the basis of the transferred property in the hands of the recipient partner, and (3) the effect of the transfer on the recipient partner’s basis in his partnership interest. Although we acknowledge that, in the absence of section 707(a)(2), our conclusions are not entirely free from doubt, we believe that the better interpretation of section 707(c) requires that a partnership recognize gain or loss on the transfer of property in satisfaction of a guaranteed payment. After bringing the changes wrought by section 707(a)(2) into the analysis, any lingering doubt in this regard vanishes. Finally, we consider the treatment of in-kind transfers in the liquidation setting that are referred to as guaranteed payments under section 736 and again conclude that the proper interpretation of Subchapter K requires that the partnership recognize gain or loss in connection with any such transfers.

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