On May 22, 2025, the House of Representatives passed the highly anticipated budget reconciliation bill, referred to as the “One Big Beautiful Bill,” with revisions from the House Rules Committee. On May 21, 2025, the House Rules Committee released the manager’s amendment, which included various revisions to the previously released draft. These revisions include a proposed amendment to the partnership disguised sale rules under section 707(a)(2) by changing the introductory phrase from “Under regulations prescribed [by the Secretary]” to “Except as provided [by the Secretary].”
The partnership disguised sale rules may apply in circumstances where a partner contributes property to, or performs services for, a partnership and receives a related direct or indirect allocation and distribution from the partnership. If the rules apply, the transaction is treated as a transaction between the partnership and a counterparty who is not a partner, or between two or more partners, acting other than in their capacity as partners of the partnership.
Based on the current statutory language, which includes the introductory phrase “Under regulations prescribed by the Secretary,” some taxpayers take the position that section 707(a)(2) is not self-executing where regulations have not been issued. Although regulations have been issued with respect to disguised sales of property to partnerships and disguised sales of property by partnerships to partners, the current regulations do not address disguised sales of partnership interests. In the absence of applicable regulations, some taxpayers assert that a transaction cannot be recast under section 707(a)(2) as a disguised sale of partnership interests. Note that previous proposed regulations on disguised sales of partnership interests were withdrawn in 2009.
It appears that the purpose of the proposed statutory change, which is consistent with a 2021 proposal by Senator Wyden, is to clarify that section 707(a)(2) is self-executing. Based on the proposed language, section 707(a)(2) would apply to transactions described in the statute, except where the Secretary provides otherwise.
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