Treasury, IRS Issue Proposed Regs Regarding Transfer of Partnership Interests

The proposed regulations provide that the amount includible in income by the transferee of the partnership interest, and the amount of the corresponding compensation deduction to the partnership, generally is equal to the fair market value of the transferred interest.

Because partnership interests can be difficult to value, and to help partnerships maintain capital accounts properly, the proposed regulations allow a partnership and its partners to elect a safe harbor under which the fair market value of a partnership interest is treated as equal to the liquidation value of the interest. The proposed regulations generally provide that a partnership that transfers a partnership interest in exchange for services recognizes no gain or loss on the transfer.

In addition, the Internal Revenue Service issued Notice 2005-43, which includes a draft revenue procedure describing additional rules and conditions relating to the safe harbor election.